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CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR £ $ ¥ i

Growing Inclusive Markets Business Works for Development • Development Works for Business United Nations Development Programme United Nations Millennium Development Goals

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Goal 1: Eradicate extreme poverty and hunger Goal 2: Achieve universal primary education Goal 3: Promote gender equality and empower women Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria, and other diseases Goal 7: Ensure environmental sustainability Goal 8: Global partnership for development

CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR

July 2008

The United Nations Development Programme (UNDP) would like to acknowledge the contributions of partner organizations to “Growing Inclusive Markets”. Each partner organization is contributing in different ways and the views and recommendations expressed in this report are not necessarily shared by each of those partner organizations. Further, the views and recommendations expressed in this report do not necessarily represent those of the UN, UNDP or their Member States.The boundaries and names shown and the designations used on the heat maps do not imply official endorsement or acceptance by the United Nations.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic, mechanical, photocopying or otherwise, without prior permission of UNDP.

Design: Suazion, Inc. (NY,USA) Production: Scanprint (Denmark) CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR

Growing Inclusive Markets Business Works for Development • Development Works for Business

United Nations Development Programme

FOREWORD FROM THE ADMINISTRATOR

The Growing Inclusive Markets Initiative, launched in 2006, embodies UNDP’s strong conviction that the private sector is a great untapped resource for investment and innovation to achieve the Millennium Development Goals. The initiative was inspired by 2004’s Unleashing Entrepreneurship: Making Business Work for the Poor, a report prepared by the UN Commission on the Private Sector and Development at the request of then-UN Secretary-General Kofi Annan. The Commission suggested that UNDP issue further reports to clarify how businesses are creating value in the difficult market conditions that so often characterize poverty—and how, in the process, they can also create value for the poor. This report, the first in a series, advances UNDP’s efforts to turn the initiative’s ideas and analysis into action through a dialogue with the private sector, government and civil society. It is the product of research based on 50 case studies, writing and reviews by a network of developing country academics and a diverse advisory group of institutions with expertise in the private sector’s role in development. Unleashing Entrepreneurship showed that, under the right market conditions, the private sector can alleviate poverty and contribute to human development in many ways. In a market economy, firms and households interact with each other and with the government. Taking risks, they earn profits and incomes that fuel economic growth. The economy’s power to generate decent jobs depends largely on the private sector’s vitality. And the private sector, by supplying consumer goods and services, brings more choices and opportunities to the poor. The private sector’s effectiveness in fostering development depends, however, on the strength of the state and on the quality of political, social and economic institutions. A strong state with enough human, financial and

i institutional resources can ensure that a market Building on UNDP’s track record of economy gives private agents the incentives advocating for change and connecting to expand their productive capacity and to countries to knowledge, experience and use it well. The State must also be able to resources to help people build a better life, ensure fair competition as well as redistribution the report starts with the markets of the of income—market outcomes are not always poor. It shows the challenges of doing politically or socially acceptable. There is business where markets suffer from a lack of also the critical need for providing social information, infrastructure and institutions. protection, supporting the most vulnerable But it also shows how businesses deal with and strengthening their capacity to sustain these challenges—by devising inclusive productive livelihoods. UNDP’s approach is business models that join business and the to emphasize developing the private sector poor to create value for all. while targeting the parts of it that promote Much work in this area has so far pro-poor growth—augmenting the choices focused on large multinational firms. of the poor by providing them with goods This report puts the work of small, medium- and services or by offering them income sized and large enterprises in developing generating opportunities and decent work. countries on an equal plane. Certainly Business and market approaches alone multinationals can lead others by example. are no panacea for tackling poverty. The With their influence, global reach and many dimensions of poverty require diverse, resources, they can effectively scale up and context-specific solutions. Many poor people replicate successful business models. But as can benefit from better access to markets if Unleashing Entrepreneurship showed, smaller they have at least a few assets—land, health, businesses also have much to teach us about education—or a small income to build on. strategies that work. And they create most of But others, with virtually no assets, are the jobs and wealth required to meet the ill-equipped for the marketplace. They Millennium Development Goals. need targeted support to help them build Business cannot stand alone, however. sustainable livelihoods and benefit from This report suggests that businesses—with market interactions. governments, civil society and the poor— How does the private sector help can build the foundations for new markets. markets include the poor? Partly by creating Governments must unleash the power of and diffusing innovations. Basic science and business by improving market conditions major technological enterprises may receive where poor people live and removing barriers support from governments, but a competitive to their economic participation. Not-for-profit economy gives entrepreneurs and businesses organizations, public service providers, strong incentives to create and apply microfinance institutions and others already innovative technologies and processes. working with the poor can collaborate and And diffusing new models and business pool resources with businesses to help seize practices is central to productivity growth. opportunities. Donors can facilitate dialogues The power of poor people to benefit between businesses and governments or from market activity lies in their ability to other partners. Socially minded investors participate in markets and take advantage and philanthropists can supply the funds to of market opportunities. What can the state make these time-intensive and uncertain do to increase that ability? It can help poor ventures possible. Business models that people develop their human capital (health, include the poor require broad support, education and skills). It can also provide but they offer gains for all. infrastructure and basic utilities and ensure that the poor are legally empowered. This report focuses on what the private sector can do to include the poor in business Kemal Dervis¸ as consumers, employees and producers. UNDP Administrator

ii CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR CONTENTS

ABOUT THE INITIATIVE AND ITS RESEARCH v

ACKNOWLEDGEMENTS xi

OVERVIEW 1

PART I. OPPORTUNITIES TO CREATE VALUE FOR ALL 13

1 OPPORTUNITIES FOR BUSINESS—AND FOR POOR PEOPLE 15 Opportunities for business: profitability and growth 16 Opportunities for the poor: improved human development 20 Cracking the code: successful examples of doing business with the poor 25

2 CONSTRAINTS STANDING IN THE WAY 29 Market information 31 Regulatory environment 32 Physical infrastructure 33 Knowledge and skills 36 Access to financial services 37

PART II. FIVE STRATEGIES AT WORK 39

3 ADAPT PRODUCTS AND PROCESSES 45 Leverage technology 47 Design business processes 50

4 INVEST IN REMOVING MARKET CONSTRAINTS 55 Ensure private value 57 Leverage social value 62

5 LEVERAGE THE STRENGTHS OF THE POOR 67 Engage the poor as individuals 69 Build on existing social networks 73

6 COMBINE RESOURCES AND CAPABILITIES WITH OTHERS 77 Combine complementary capabilities 79 Pool resources 84

7 ENGAGE IN POLICY DIALOGUE WITH GOVERNMENTS 89 Engage individually 92 Engage through demonstration effects 94 Engage collaboratively 94

8 TAKING ACTION 97

ANNEXES 103

Annex 1. Case studies bank 105 Annex 2. Case study research methodology 133 Annex 3. About market heat maps 137

BIBLIOGRAPHY 145 BOXES

The Growing Inclusive Markets Initiative Advisory Board vi Case studies prepared for the Growing Inclusive Markets Initiative ix Box 1 What are inclusive business models? 2 Box 1.1 Inclusive business models and the Millennium Development Goals 21 Box 1.2 Access to credit in Guatemala 24 [1] Market heat map: Households living on more than $2 a day [2] Sources of credit: Households living on more than $2 a day [3] Market heat map: Households living on less than $2 a day [4] Sources of credit: Households living on less than $2 a day [5] Opportunity: Estimates of the use of credit in Guatemala among households living on less or more than $2 a day Box 1.3 The booming market for mobile phone telephony in South Africa 27 [1] Market heat hap: Households living on more than $2 a day [2] Access to a mobile phone in South Africa: Households living on more than $2 a day [3] Market heat map: Households living on less than $2 a day [4] Access to a mobile phone in South Africa: Households living on less than $2 a day Box 2.1 Overlapping market constraints in Guatemala 30 Box 2.2 Market heat maps 32 Box 2.3 Market constraints affect market structure: Haiti’s water market 35 Box 2.4 Microinsurance in India 37 Box II.1 Smart Communications: international remittances through wireless phones in the Philippines 42 Box 3.1 Case study – Tsinghua Tongfang: bridging a digital divide 46 Box 3.2 Mobile banking: branchless and wireless 48 Box 3.3 Smart cards: high-tech payments allow Amanz’abantu to bring water to South Africa’s poor 49 Box 4.1 Case study – Tiviski: money well spent 56 Box 4.2 The Integrated Tamale Fruit Company: investing to remove market constraints and ensure quality crops 59 Box 4.3 Offering grants for inclusive business model development: the challenge funds of the UK Department for International Development 63 Box 5.1 Case study – The HealthStore Foundation: providing health care in remote areas 68 Box 6.1 Case study – Construmex: ‘Hazla, Paisano!’ 78 Box 6.2 How to find a partner – without a partner? 80 Box 6.3 Microfinance institutions – the rural retail agents? 82 Box 7.1 Case study – CocoTech: reviving an ailing coconut industry 90 Box A2.1 Case study research questions 134 Box A3.1 Examples of geographic poverty mapping initiatives 138

FIGURES

Figure 1 Market heat map for access to credit in Guatemala 3 Figure 2 Growing Inclusive Markets strategy matrix 8 Figure 3 Growing Inclusive Markets strategy matrix and summary of solutions 10 Figure 1.1 Four billion people at the base of the pyramid 18 Figure 1.2 How poor consumers spend their money 19 Figure 1.3 Mobile phone subscribers per 100 inhabitants, 2006 26 Figure 2.1 Average time and cost to open a business, by region 33 Figure 2.2 Businesses see infrastructure as a serious constraint 34 Figure 2.3 Insurance penetration is low in most developing countries 36 Figure II.1 Growing Inclusive Markets strategy matrix 40 Figure 3.1 Summary: Approaches to adapting products and processes 53 Figure 4.1 Summary: Approaches for investing in markets to remove constraints 65 Figure 5.1 Summary: Approaches to leveraging the strengths of the poor 75 Figure 6.1 Summary: Approaches to combining resources and capabilities with others 87 Figure 7.1 Summary: Approaches to engaging in policy dialogue with governments 95 Figure 8.1 Growing Inclusive Markets strategy matrix and summary of solutions 98 Figure A2.1 Distribution of cases studies by region, sector and type of company 135 Figure A3.1 Market heat map for access to water in Haiti in 2001 139 Figure A3.2 Market heat map for access to mobile phones in South Africa, 2006 (population living on more than $2 per capita per day) 141 Figure A3.3 Market heat map for access to mobile phones in South Africa, 2006 (population living on less than $2 per capita per day) 142 Figure A3.4 Intersection of poor people with mobile phones who lack access to a bank, selected countries 143 ABOUT THE INITIATIVE AND ITS RESEARCH

Cape Verde: Local businesses—from small- scale fishers to large national companies— are the main focus of this initiative. Photo: UNICEF/JuliePudlowski

The Growing Inclusive Markets Initiative responds to a need for better understanding of how the private sector can contribute to human development and to the Millennium Development Goals. Led by UNDP, the initiative was conceived in 2006 after the success of Unleashing Entrepreneurship: Making Business Work for the Poor—the 2004 report of the UN Commission on the Private Sector and Development, prepared at the request of then-UN Secretary-General Kofi Annan. The initiative’s broad aims are: Raising awareness by demonstrating how doing business with the poor can be good for poor people and good for business. Clarifying the ways that businesses, governments and civil society organizations can create value for all. Inspiring the private sector to action.

v The Growing Inclusive Markets Initiative Advisory Board the needs and interests of those partners. Thus, the initiative’s advisory group comprises diverse institutions with an interest in the private sector’s development role—including The Advisory Board has formed the core of leading international development agencies, the Growing Inclusive Markets Initiative. global business organizations representing Its guidance, insights and inputs have been hundreds of companies and experts from invaluable to the initiative and to this report. well-known research institutions operating § Agence Française de Développement at the interface of business and development. § Business for Social Responsibility By disseminating its research findings and analytical tools, the initiative helps § Dalhousie University, Faculty of Management business leaders, policymakers and other § ESSEC Business School, Institute for Research development practitioners—especially in and Education on Negotiation in Europe developing countries—support business § European Foundation for Management models that include the poor. Development Five principles guide the initiative’s work: § Global Development Alliance, United States Agency for International Development Core business emphasis. The initiative § Harvard Business School, promotes business models that create Social Enterprise Initiative value by providing products and services § Harvard Kennedy School, to or sourcing from the poor, including Corporate Social Responsibility Initiative the earned income strategies of non- § Institute of Business, University of West Indies, governmental organizations. It does Trinidad and Tobago not consider activities that are purely § International Business Leaders Forum philanthropic or that cannot prove to be or become commercially sustainable, § International Chamber of Commerce even though they have their own § International Finance Corporation business rationales and are important § Johnson Graduate School of Management, for development. Center for Sustainable Global Enterprise, Cornell University Developing world focus. The initiative § Overseas Development Institute, Programme is particularly interested in developing on Business and Development Performance country businesses as central actors § Special Unit for South-South Cooperation, in providing goods, services and job United Nations Development Programme. opportunities to the poor. To sharpen § United Nations Foundation this focus, the Growing Inclusive Markets Initiative commissioned 50 case § United Nations Global Compact studies of companies from researchers § University of Michigan, Ross School of Business, and academics in countries from Peru William Davidson Institute to Kenya to the Philippines. This § World Business Council for Sustainable bottom-up process, anchored in local Development knowledge, is producing an ever-growing § World Economic Forum network of development practitioners, § World Resources Institute policymakers, business people and civil society actors. Human development framework, UNDP resolved from the outset to guided by the Millennium Development create a multistakeholder, open process, Goals. Human development expands involving as wide as possible a range of people’s choices to lead lives that they partners, which could constantly evolve with value. This understanding of poverty

vi CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR guides the work of UNDP, which has UNDP’s Egypt Country Office has explored and applied the concept of already published a national report human development since 1990 in its on ‘Business Solutions to Human annual Human Development Report. Development’ and fostered a multi- The initiative also applies a human stakeholder dialogue at the local level. development framework to doing Partnership and multistakeholder business with the poor, concentrating approach. The initiative has a multi- on meeting basic needs and providing sector, networked approach and a access to the goods, services and earning commitment to involve many partners opportunities that foster economic from different backgrounds—from empowerment. It shows how the private the academic world to the development sector can contribute to achieving the community to business associations—who Millennium Development Goals. are leaders in business and development Local agenda. The initiative is explicitly thought. In this spirit, the information, modeled on UNDP’s success in localizing analysis and tools generated by the its Human Development Reports to shape initiative will all be published online, national agendas and promote policy to be discussed and supplemented by changes in countries around the world. interested parties.

RESEARCH TOOLS

Among the immediate objectives of the Growing Inclusive Markets Initiative is to create an initial set of data, information and analytical products that will increase understanding of the markets for the poor, including existing opportunities and challenges. Market heat maps identify opportunities by depicting access to water, credit, electricity or telephone service. Offering Poland: PEC Luban uses straw as a renewable resource for heat generation. Photo: PEC Luban a visual overview of the landscape— and a first look at possible markets— data permitting, the maps are supported by information on the structure of those The case studies bank helps to markets, such as the various kinds find solutions by learning from the of providers. experiences of others. Fifty case studies, written for this report, describe The Growing Inclusive Markets strategy successful business models that include matrix is an analytical framework that the poor. Summarized in annex 1, helps to identify market constraints and the full cases are available online at think through strategies for addressing www.growinginclusivemarkets.org. them. It links five broad constraints More cases will be added from the in the markets of the poor with five initiative and other sources to make strategies that can yield solutions. the bank a rich repository of ideas.

ABOUT THE INITIATIVE AND ITS RESEARCH VII APPROACH

This research was strictly based on an models described and do not confirm a empirical approach—to see and measure preformed hypothesis about what patterns poor people’s access to markets, and to might exist. learn how businesses work successfully With help from the institutions with the poor. involved in the advisory group, 50 case The case study research followed studies were selected from 400 possible an inductive principle. The cases identify cases. The selected cases had to describe common patterns among the business business models that included the poor in ways that could be profitable and that clearly promoted human development. In addition, they had to represent a broad range of countries, industries and business types. Eighteen case study authors then described the selected cases based on a common protocol, focusing on the opportunities, constraints and solutions in each case. The protocol made it possible to analyse the case studies systematically and look for patterns. The result was the Growing Inclusive Markets strategy matrix, which summarizes the dominant constraints and the strategies used to address them. (Annexes 1 and 2 contain more detail on the research approach, with short descriptions of the 50 cases.) The market heat maps were generated by experts from Latin America and southern Africa. Household and individual surveys measured access to markets that are particularly important for the poor, such as water, electricity, credit and telecommunications, and revealed the structure of those markets (expressed, for example, by source or provider type). Some of the data were transformed into spatial maps, creating a tool that can be used intuitively. (More detail on the methodology for creating market heat maps is in annex 3.)

Bangladesh: Microcredit loans provided by UNDP allow villagers of Kishoreganj District to start family businesses. Photo: Shamsuz Zaman/UNDP

viii CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Case studies prepared for the Growing Inclusive Markets Initiative

Case Description A to Z Textiles (Tanzania) Production of long-lasting insecticide-treated bed nets Amanco (Mexico) Integrated irrigation solutions for small-scale farmers Amanz’abantu (South Africa) Supplying water through smart card technology ANZ Bank (Fiji) Mobile financial products and services Aspen Pharmacare (South Africa) Manufacturing affordable generic antiretroviral drugs Association of Private Water Operators (Uganda) Public-private partnership to provide water in small towns Barclays’ Susu Collectors Initiative (Ghana) Providing microfinance services through traditional Susu collection Cashew Production (Guinea) Partnership aimed at reviving the cashew industry Celtel (Dem. Rep. Congo) Mobile communication and mobile banking in a postwar economy Coco Technologies (Philippines) Production of geotextiles from coconut husk waste Construmex (Mexico / United States) Cash-to-asset remittance transfer services Danone (Poland) Affordable and highly nutritious milk porridge for malnourished children Denmor Garments (Guyana) Production of high quality garments for export DTC Tyczyn (Poland) District telephone cooperative Edu-Loan (South Africa) Loans for financing superior studies Fair Trade Cotton (Mali) Collaborative platform for sourcing fair trade cotton Forus Bank (Russia) Financial services for low-income entrepreneurs Huatai (China) Wood-pulp production for paper industry Integrated Tamale Food Company (Ghana) Outgrower scheme for sourcing organic mangoes Juan Valdez (Colombia) Coffee fair trade chain directly linking producers, businesses and consumers K-Rep Bank (Kenya) Microfinance products and services Lafarge (Indonesia) Rebuilding cement-based houses and businesses in post-tsunami areas LYDEC (Morocco) Supplying water and electricity to shanty towns Manila Water Company (Philippines) Connecting low-income households to the piped water system Mibanco (Peru) Microfinance products and services Money Express (Senegal) Remittance transfer services M-PESA (Kenya) Mobile banking services Mt Plaisir Estate Hotel (Trinidad and Tobago) Ecotourism-based self-sustaining community Narayana Hrudayalaya (India) Affordable cardiac health care Natura (Brazil) Production of perfume essences from local vegetal biodiversity Nedbank and RMB/FirstRand (South Africa) Financial products targeted at the low-income housing market New Tirupur Area Development Corp. Ltd. (India) Water supply to industries, households and slums PEC Luban (Poland) Straw-based heat generation Pésinet (Mali / Senegal) Early warning method for monitoring children’s health Petstar (Mexico) Waste management services in poor rural communities Procter & Gamble (Cross-regions) Affordable purifier of water sachets Rajawali (Indonesia) Business partnership between taxi company and poor drivers RiteMed (Philippines) Generic drugs production and distribution Rural Electrification (Mali) Rural companies installing and managing electricity generating systems Sadia (Brazil) Sustainable swine production through biodigester technology Sanofi-aventis (Sub-Saharan Africa) Providing drugs in partnership to fight sleeping sickness SEKEM (Egypt) Organic agriculture production coupled with social and cultural activities SIWA (Egypt) Ecotourism business based on local community specificities Smart (Philippines) Mobile telecom products and services for low-income and overseas communities Sulabh (India) Low-cost, clean and innovative sanitation systems The HealthStore Foundation (Kenya) Health microfranchises Tiviski Dairy (Mauritania) Camel dairy sourcing from nomadic herders Tsinghua Tongfang (THTF) (China) Affordable computers for rural users VidaGás (Mozambique) Supply of liquefied petroleum gas Votorantim Celulose e Papel (Brazil) Eucalyptus plantation for pulp and paper industry

ABOUT THE INITIATIVE AND ITS RESEARCH IX

ACKNOWLEDGEMENTS

Vietnam Photo: Jim Holmes/UNCDF

ADVISORY BOARD MEMBERS

The very essence of the Growing Inclusive Markets initiative rests on its multistakeholder approach, illustrated by the number and diversity of its Advisory Board members. Their guidance, insights and inputs have been invaluable to the initiative and to this report. The Advisory Board comprised: Eduardo Aninat, Former Minister of Finance, Chile, and CEO, Anisal International Consultants Ltd. Rolph Balgobin, Director Institute of Business, University of West Indies Kathryn Bushkin Calvin, Executive Vice President and Chief Operating Officer, United Nations Foundation Jean-Marc Châtaigner, Director, Strategic Planning Department, Agence Française de Développement (through June 2007)

xi Eric Cornuel, Director, European Foundation Alain Lempereur, Director, Institute for Management Development for Research and Education on Negotiation in Europe, ESSEC Aron Cramer, Chief Executive Officer, Business for Social Responsibility Ted London, Senior Research Fellow and Director, Base of the Pyramid Initiative, Lisa Dreier, Associate Director, Global William Davidson Institute, University Institute for Partnership and Governance, of Michigan World Economic Forum Jane Nelson, Senior Fellow and Director of Shona Grant, Director, Development Focus Corporate Social Responsibility Initiative, Area, Sustainable Livelihoods Project, World Harvard Kennedy School, and Director Business Council for Sustainable Development of Strategy, International Business Stuart Hart, Professor of Management, Leaders Forum Samuel C. Johnson Chair in Sustainable Daniel Runde, Director (through May 2007), Global Enterprise, Johnson School, and Jerry O'Brien, Deputy Director, Cornell University Global Development Alliance, U.S. Agency for International Development Adrian Hodges, Managing Director, International Business Leaders Forum Kasturi Rangan, Malcolm P. McNair Professor of Marketing and Co-Chair Bruce Jenks, Assistant Secretary-General and of Social Enterprise Initiative, Director, Partnerships Bureau, United Nations Harvard Business School Development Programme Harold Rosen, Director, Grassroots Business Louise Kantrow, Permanent Representative Initiative, International Finance Corporation to the United Nations, International Chamber of Commerce Michael Warner, Director, Programme on Business and Development Performance, Georg Kell, Director, United Nations Overseas Development Institute (through Global Compact March 2008) William Kramer, Deputy Director (through David Wheeler, Dean of Management, August 2007), World Resources Institute Faculty of Management, Dalhousie University Rachel Kyte, Director, Environment and Yiping Zhou, Director, Special Unit Social Development Department, for South-South Cooperation, United International Finance Corporation Nations Development Programme

We would like to pay tribute to Robert Davies, the CEO of the International Business Leaders Forum, and a member of the Growing Inclusive Markets Initiative Advisory Board, who passed away on August 18, 2007. Robert had been a valuable friend and champion of the UNDP’s engagement with the private sector, and the initiative benefited greatly from his wisdom, support and collaboration. The UNDP is also thankful to Chad Bolick (BSR), Sara Carrer (EFMD), Konrad Eckenschwiller (GC France), Amanda Gardiner (IBLF), Sasha Hurrell (IBLF), Robert Katz (WRI), Michael Kelly (LPG Foundation), Emmanuelle Lachaussée (AFD), Mark Milstein (Cornell University), Soren Petersen (GC), Melissa Powell (GC), Tara Rangarajan (BSR), Francisco Simplicio (SU/SSC), Ross Tennyson (IBLF), Fillipo Veglio (WBCSD) and Jack Whelan (IBLF) for their active support.

xii CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Following the March 2006 meeting, members of the Advisory Board divided into three work streams: Working Group on Case Studies Co-chairs: Professor David Wheeler, Dean of Faculty of Management, Dalhousie University of Halifax, and Professor Alain Lempereur, Director of the Institute for Research and Education on Negotiation in Europe, ESSEC. Supported by the UNDP Private Sector Division. Working Group on Data and Statistics Co-chairs: Professor V. Kasturi Rangan, Malcolm P. McNair Professor of Marketing, Harvard Business School, and Eduardo Aninat, Anisal International Consultants Ltd. Supported by the UNDP Office of Development Studies. Working Group on Communications and Outreach Co-chairs: Jane Nelson, Director of Corporate Social Responsibility Initiative, John F. Kennedy School of Government, Harvard University, and Eric Cornuel, Director General and Chief Executive Officer, European Foundation for Management Development. Supported by the UNDP Office of Communications.

CASE STUDY AUTHORS

This report would not exist without the precious contributions of the case study authors:

Farid Baddache, Ecole Supérieure des Winifred Karugu, Institute for Human Sciences Economiques et Commerciales Resources Development (Kenya) (ESSEC), Institute for Research and Professor Li Ronglin, Peterson Institute of Education on Negotiation in Europe (France) International Economics and Center for Claudio Boechat, Dom Cabral World Trade Organization Studies (China) Foundation (Brazil) Robert Osei, Institute of Statistical Social Juana de Catheu, École Supérieure des and Economic Research (Ghana) Sciences Economiques et Commerciales Melanie Richards, Arthur Lock Graduate (ESSEC), Institute for Research and School of Business (Trinidad & Tobago) Education on Negotiation in Europe (France) Boleslaw Rok, Kozminski Academy of Pedro Franco, Universidad del Pacífico (Peru) Entrepreneurship and Management (Poland) Elvie Grace Ganchero (Philippines) Loretta Serrano, Tecnológico de Mamadou Gaye, African Institute Monterrey Social Enterprise Knowledge of Management (Senegal) Network (Mexico) Dr. Tarek Hatem, American University Dr. Shi Donghui, Shanghai University (China) in Cairo (Egypt) Courtenay Sprague, University of the Dr. Prabakar Kothandaraman, Harvard Business Witwatersrand’s Graduate School of Business School’s Indian Research Center (India) Administration (South Africa)

ACKNOWLEDGEMENTS XIII FINANCIAL CONTRIBUTORS

Without the financial support of the Agence Française de Développement, the Japanese government and the U.S. Agency for International Development, this report would not have been possible. In this respect, the support of Jean-Marc Châtaigner and Dan Runde who committed themselves to this initiative from the beginning deserves special mention.

REPORT DEVELOPMENT

The initiative owes a particular debt, gratitude, to the Unleashing Entrepreneurship report under the leadership of Paul Martin and Ernesto Zedillo with the strong support of Mark Malloch Brown. This report encouraged UNDP to undertake this work. The initiative benefited from the leadership of Kemal Dervis¸, Administrator of UNDP, whose support for the initiative over the last 3 years has been essential. Bruce Jenks, Assistant Secretary-General and Director of the Partnerships Bureau, UNDP, chaired the Advisory Board and has provided overall leadership of this initiative from its inception. The first report of the Growing Inclusive Market Initiative has involved different divisions within UNDP under the overall management of UNDP’s Private Sector Division of the Partnerships Bureau and represents an important component of the new Private Sector Strategy.

UNDP SENIOR MANAGEMENT GROUP

The Senior Management Group of the Growing Inclusive Markets Initiative, which provided overall guidance, comprised Bruce Jenks, Christian Thommessen, Pedro Conceição, David Morrison, Sahba Sobhani and Afke Bootsman. Christian Thommessen, Director of the Private Sector Division, supervised the work of the Growing Inclusive Markets Secretariat, established to lead the programme management and implementation of the initiative and manage the case study work stream. Pedro Conceição, Director of the Office of Development Studies, managed the work stream on Data and Statistics. David Morrison, Director of the Office of Communications, was responsible for the Communications and Outreach work stream. The initiative also benefited from a partnership with the Special Unit for South-South Cooperation, an autonomous UN unit housed within UNDP, which provided financial support to the initiative under the leadership of its director, Yiping Zhou.

xiv CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR GROWING INCLUSIVE MARKETS TEAM

This report was carried out by a dedicated Kevin McKague, Senior Research Fellow, core team from UNDP, including members York Institute for Research and Innovation of the Private Sector Division, the Office in Sustainability of Development Studies and the Office Principal research assistance at various stages was of Communications. provided by Semira Ahdiyyih, Prerna Kapur, Taimur Khilji, Sana Mostaghim and Suba Private Sector Division Sivakumaran. Interns included Alison Laichter, Sahba Sobhani, Programme Manager and Lead Alia Mahmoud and Li Yang. Author of the report, managed the Growing Inclusive Markets Initiative Team, housed in the Office of Development Studies UNDP’s Private Sector Division and comprising the following team members: The work of the Data and Statistics work stream was led by Ronald Mendoza, Project Manager, and included Namsuk Kim, Economist, and Growing Inclusive Markets Secretariat Nina Thelen, Research Associate. Afke Bootsman, Deputy Programme Manager and Case Studies Coordinator Office of Communications Austine Gasnier, Research Associate Colleagues from the Office of Communications Jan Krutzinna, Knowledge contributing to the website development, report Management Consultant production, and communications activities of the Patricia Maw, Administrative Associate initiative included Benjamin Craft, Writer; Tracy Zhou, Consultant seconded from Nicholas Douillet, Web Content Manager; Special Unit for South-South Cooperation Françoise Gerber, External Communications Team Coordinator; Carmen Higa, Executive Assistant; Rajeswary Iruthayanathan, Chief, Principal Report Co-Authors Communication Services; Maureen Lynch, Christina Gradl, Martin Luther University Communication Products Manager; Boaz Paldi, Halle-Wittenberg TV Broadcast Specialist; Nicole Pierron, Beth Jenkins, Director of Policy Studies, Communications Assistant; Rositsa Todorova, Harvard Kennedy School Special Assistant to the Director; and Cassandra Waldon, Chief of External Communications. Case Studies Reviewers Jane Comeault, Visiting Research Fellow, Editors Dalhousie University Bruce Ross-Larson and Nick Moschovakis

ACKNOWLEDGEMENTS XV READERS AND EXPERTS

The content of this report has benefited from December 2006, including Pablo Acosta, José De invaluable inputs from a number of readers and Luna Martínez, Carlos Linares, Illana Melzer, experts, who generously gave their time and Jordan Schwartz, Daniel Shepherd and Nikola expertise to help shape our thinking: Spatafora. They are also grateful to external Nava Ashraf, Harvard Business School collaborators from various UN and international agencies and in academia, including Annie Bertrand, George Dragnich, U.S. Department of State Adriana Conconi, Lorant Czaran, Paola Deles, Martin Hall, University of Cape Town Maitreesh Ghatak, Celine Kauffmann, Inge Kaul, Branko Milanovic, Maria Minniti, Ria Moothilal, Michael Henriques, Liana Razafindrazay, Mark Schreiner, Balkissa International Labour Organization Sidikou-Sow and Luis Tejerina. In addition, Martin Herrndorf, University of St. Gallen thanks are due to Zeynep Akalin, Christine Matt Humbaugh, Presidio Union, LLC Yeonhee Kim, Monica Lo and Brandon Vick for providing excellent research assistance, as well as Aline Krämer, Technische Universität München to our colleagues at the Office of Development Wilfried Lütkenhorst, UNIDO Studies for their comments and suggestions. The Growing Inclusive Markets Team would Jörg Meyer-Stamer, Mesopartner like to thank David Wheeler, co-chair of the Prof. Ingo Pies, Martin-Luther-University Case Studies Working Group, for his outstanding Halle-Wittenberg leadership and guidance, including the organization Julia Steets, Global Public Policy Institute of the Case Studies Workshop held in Paris. The initiative benefited greatly from his vision Eric Werker, Harvard Business School of setting up a network of developing country Pierre Yared, Columbia Business School academics to conduct the research for the case studies. The Team would also like to thank Ted The Working Group on Data and Statistics, London, Director of the Base of the Pyramid under the leadership of Ambassador Eduardo Initiative at the William Davidson Institute, Aninat and Professor V. K. Rangan, would like to University of Michigan, for his background paper, thank participants in the expert group meeting on on ‘A Base-of-the-Pyramid Perspective on Poverty market and poverty mapping held in New York in Alleviation’.

xvi CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR UNDP

A Readers Group comprising colleagues within Cihan Sultanoglu, Deputy Director of the UNDP provided many useful comments, suggestions Regional Bureau for Europe and the CIS; and inputs during the writing of the report. Special Abdoulaye Mar Dieye, Deputy Director of the mention must be made of the contributions and Regional Bureau for Arab States; Maxine Olsen, advice of colleagues in the field, including: and a number of regional private sector focal points including Taimur Khilji, Marielza Oliveira Flavio Fuertes, UNDP Argentina and Alexandra Solovieva. Colleagues from the Alejandro Pacheco, UNDP El Salvador Private Sector Division included Lucas Black, Jonathan Brooks, Anne Delorme, Natsagdorj Mohamed El-Kalla and Nahla Zeitoun, Gereltogtokh, Jonas Giersing, Arun Kashyap, UNDP Egypt José Medina Valle, Karolina Mzyk, Helena Jeff Liew, UNDP Fiji Nielsen, Rohithari Rajan, Patrick Silborn, Hansin Dogan, UNDP Turkey Casper Sonesson, and Tomas Sales. The Partnership Bureau under the guidance Pascale Bonzom, UNDP Madagascar of Romesh Muttukumaru, Deputy Assistant Administrator and Deputy Director, Partnerships Many within the extended UN family gave Bureau, and the management of Yves Sassenrath, generously of their time and expertise, including Operations Manager, provided tireless support Olav Kjorven, Director of the Bureau for to the project, and included Isabel Chang, Development Policy and his colleagues; Gilbert Constancia Gratil, Margaret Heymann, Elfrida Houngbo, Director of the Regional Bureau Hoxholli, Sunda May, Isabel Relevo, Ben Ombrete for Africa; Diana Opar, Gender Adviser; and Ricky Wong.

EDITING, DESIGN AND PRODUCTION

Last but not least, we thank wholeheartedly those who helped us with the editing, production and translation, working under very tight deadlines: Bruce Ross-Larson, Nick Moschovakis, Amye Kenall and Christopher Trott, Communications Development Inc.; Heather Bourbeau, James Cerqua, Jean Fabre, Karen Sturges-Vera and Dorn Townsend; Julia Dudnik Stern and her team from Suazion; Fola Yahaya, Maria Janum, Véronique Litet, Florence Lesur, Francine Hatry-McCaffery, Sylvia Zilly, Géraldine Chantegrel and Annelise Meyer from Strategic Agenda; Irene Alvear and her team from LTS Language Translation Services; and Dennis Lundø Nielsen and his team from Scanprint. We also thank Adam Rogers, Julie Pudlowski, Grégoire Guyon, Rob Katz, Mariko Tada and Caroline Dewing for providing pictures for the report.

ACKNOWLEDGEMENTS XVII

OVERVIEW BUSINESS WITH THE POOR—CREATING VALUE FOR ALL

Mali: Poor cotton farmers involved in Fair Trade are earning higher incomes and the companies sourcing from them are earning a competitive advantage, while protecting the environment. Photo: Armor-Lux

The extreme prevalence of poverty in today’s world calls us urgently to action. Of the world’s 6.4 billion people, about 2.6 billion live on less than US$2 a day.1 More than a billion lack clean water, 1.6 billion lack electricity,2 and 5.4 billion lack access to the Internet.3 Yet the poor harbour a potential for consumption, production, innovation and entrepreneurial activity that is largely untapped. This report shows how entrepreneurs can serve the poor as clients and customers and can also include the poor as producers, employees and business owners. It gives many examples of firms that—by doing business with the poor—are generating profits, creating new growth potential and improving poor people’s lives. The report’s main message: Business with the poor can create value for all. The opportunities are vast, and so are the obstacles. Rural villages and urban slums are challenging environments for doing business. Systems rarely exist for collecting and delivering goods and providing services. Essential market infrastructure is limited or nonexistent. Without working financial systems, the

1 Box 1. What are inclusive business models? poor inhabit a cash economy. Without Inclusive business reliable police and legal systems, all market models include actors can find it difficult or impossible to the poor on the enforce contracts. For most firms, business demand side as clients and customers, and on the with the poor will not be business as usual. supply side as employees, producers and business Perhaps the greatest obstacle is the lack owners at various points in the value chain. They build bridges between business and the poor for of information about the poor. What goods mutual benefit. and services do they need? How much can The benefits from inclusive business models they pay? What goods could they produce go beyond immediate profits and higher incomes. and what services could they provide? The For business, they include driving innovations, aim of this report is to help entrepreneurs building markets and strengthening supply chains. and companies begin to answer such questions. And for the poor, they include higher productivity, sustainable earnings and greater empowerment. The report draws on 50 specially This report’s conception of inclusive business commissioned case studies of businesses models builds on and reinforces the work of the that have successfully included the poor, World Business Council for Sustainable Development despite the constraints, and created value and others with an interest in inclusive business. for all. The cases afford a wealth of ideas for inclusive business models (box 3).

OPPORTUNITIES TO CREATE VALUE FOR ALL

Doing business with poor people brings them into the marketplace—a critical step on the path out of poverty—and for entrepreneurs and firms it drives innovation, builds markets and creates new spaces for growth. Inclusive business models both produce and reap the benefits of human development. The poor participate in the private sector. All are consumers. Most are employees or self- employed. Yet fragmented and informal markets prevent too many of them from obtaining the resources they need, and from using their resources productively. Among the poor, much business is informal. Friends and family often provide credit. Small and unregulated businesses often deliver bottled water in trucks. As a consequence, competition is stunted and goods and services can be expensive. Market heat maps reveal the fragmentation of these markets. They show how widely access to goods, services or infrastructure can vary in a country. For example, in Guatemala’s western regions more than 13% of people living on less than $2 a day have access to credit, but in its eastern regions fewer than 8% do (figure 1). That contrast reflects other differences between market conditions in the two areas, such as differences in road access. (In poor markets such constraints often overlap, compounding the challenges for business.)

2 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Peten

BELIZE MEXICO

PETEN

NOROCCIDENTE Alta Verapaz Huehuetenango Quiche NORTE Izabal

NORORIENTE Totonicapan Baja Verapaz San Marcos Zacapa El Progreso Quetzaltenango Chimaltenango Guatemala HONDURAS Chiquimula Figure 1. Jalapa SUROCCIDENTE METROPOLITANA Market heat map

Retalhuleu Suchitepequez for access to credit SURORIENTE Escuintla in Guatemala Jutiapa CENTRAL REGION Santa Rosa

EL SALVADOR

Share of households living on less than $2 a day with access to credit, by region, 2000 (%)

4 - 8 4 - 8 8 - 118 - 11 11 - 1311 - 13 Sources of credit available025Km to households living on 13 - 1613 - 16 less than $2 a day, 2000 (%)

025Km Urban Rural 100

80 Source: Instituto Nacional de Estadistica de Guatemala. Map produced by OCHA ReliefWeb. 60 No credit Shopkeeper, villager, relative 40 or friend, other Money lender, microcredit 20 institution, credit union 0 Bank

OVERVIEW: BUSINESS WITH THE POOR—CREATING VALUE FOR ALL 3 OPPORTUNITIES FOR BUSINESS: PROFITS AND GROWTH

Business with the poor can be profitable. It services to improve the lives of the poor— can also lay the foundations for long-term can reap pioneer profits in return. growth by developing new markets, driving Driving innovation. The challenge innovation, expanding the labour pool and of developing inclusive business models strengthening value chains. can lead to innovations that contribute to a Generating profits. Business with company’s competitiveness. For example, to meet the poor’s preferences and needs, firms the poor can sometimes yield higher rates of must offer new combinations of price and return than ventures in developed markets. performance. And the pervasive constraints Some microcredit institutions have earned that businesses encounter when doing more than a 23% return on equity.4 Smart business with the poor—from transportation Communications, a company providing difficulties to the inability to enforce contracts— prepaid phone services mainly to low-income require creative responses. These forces drive consumers in the Philippines, became the the development of new products, services most profitable of the country’s 5,000 largest and business models that can catch on in corporations. Sulabh, a low-cost sanitation other markets, giving innovative companies facilities provider in India, had a $5 million a competitive advantage in poor markets. economic surplus in 2005. Expanding the labour pool. The poor Developing new markets. The 4 billion are a large source of labour. The advantages people at the bottom of the income pyramid of hiring them as employees go beyond (defined as people living on less than $8 a day) cost savings. With adequate training and have a combined income of about $5 trillion, well-targeted marketing, the poor can deliver similar to the gross national income of Japan.5 high-quality products and services. Or their local knowledge and connections may place They are willing and able to pay for goods them well to serve other poor consumers in and services, but too often they suffer from a their communities. ‘poverty penalty’. Sometimes they pay more Strengthening value chains. For than rich consumers for essential products firms that procure locally, incorporating and services. People in the slums of Jakarta, the poor in business value chains—as Manila and Nairobi pay 5–10 times more for producers, suppliers, distributors, retailers water than people in high-income areas of and franchisees—can expand supply and those cities—and more than consumers in lower risk. That allows them to reduce costs London or New York. The ‘poverty penalty’ and increase flexibility, especially as the local is similar in credit, electricity and health businesses move into more specialized or care.6 Business models that offer better value higher-skill activities such as component for money—or entirely new products and production and business services.

OPPORTUNITIES FOR THE POOR: ADVANCING HUMAN DEVELOPMENT

Businesses can also improve the lives of poor people, contributing broadly to what the UN terms ‘human development’—expanding people’s opportunities to lead lives they value. Meeting basic needs. Food, clean water, sanitation, electricity and health-related services all meet people’s basic needs. In the Philippines, RiteMed sells generic drugs to more than 20 million low-income clients at prices 20%–75% less than leading brands.

4 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Guinea: Improving transportation infrastructure will enable the poor to become more productive. Photo: Adam Rogers/UNCDF

In South Africa Amanz’abantu provides people (90% of them women) producing clean water and sanitation to periurban and insecticide-treated bednets and pays them rural populations in the Eastern Cape, where 20%–30% more than competitors. a quarter of people lack potable water. Empowering the poor. All these Enabling the poor to become more contributions support the empowerment of productive. Access to products and services— poor people, individually and communally, from electricity to mobile telephony, from to gain more control over their lives. By agricultural equipment to credit and insurance— raising awareness, by providing information improves people’s productivity. In Mexico, and training, by including marginalized Amanco provides small-scale lemon farmers groups, by offering new opportunities and by with water-efficient drip irrigation systems conferring hope and pride, inclusive business that allow for continuous production 8–10 models can give people confidence and new months a year. The systems are expected to sources of strength to escape poverty using increase the farmers’ annual yields from 9 to their own means. 25 tons a hectare. In Morocco, Lydec provides water and electricity to Casablanca’s shantytowns, increasing the share of people with CONSTRAINTS STANDING electricity and water services by 20%. IN THE WAY Increasing incomes. Including poor people in value chains as customers, employees, With the opportunities so great, why haven’t producers and small-business owners can more businesses taken advantage of them? increase their incomes. In the Amanco case Simply put, market conditions surrounding in Mexico, productivity increases are expected the poor can make doing business difficult, to nearly triple the farm incomes. In China, risky and expensive. Where poverty prevails, Huatai provides alternative income sources the foundations for functional markets are for local tree farmers and significantly adds to often lacking, excluding the poor from the incomes of about 6,000 rural households. meaningful participation and deterring In Tanzania, A to Z Textiles employs 3,200 companies from doing business with them.

OVERVIEW: BUSINESS WITH THE POOR—CREATING VALUE FOR ALL 5 The case studies in this report identify networks are lacking. For example, Tsinghua five broad constraints: Tongfang, a computer manufacturer seeking Limited market information. to distribute its products in rural China, had Businesses know too little about the poor— to overcome the lack of telecommunications what poor consumers prefer, what they can infrastructure and internet service providers afford and what products and capabilities in those areas. they have to offer as employees, producers Missing knowledge and skills. and business owners. This was a significant Poor consumers may not know the use constraint when Barclays Bank started to and benefits of particular products, or may offer financial products to the poor in Ghana. lack the skills to use them effectively. Poor suppliers, distributors and retailers may lack Ineffective regulatory environments. the knowledge and skills to deliver quality The markets of the poor lack regulatory products and services consistently, on time frameworks that allow business to work. and at a set cost. For example, because rural Rules and contracts are not enforced. People farmers in Brazil did not know how to and enterprises lack access to the opportunities grow priprioca—a plant used for perfume and protections afforded by a functioning essence—Natura had to train them. legal system. For example, Sadia, a food Restricted access to financial processing company, faced undeveloped products and services. Lacking credit, domestic carbon credit regulations when poor producers and consumers cannot it began using improved environmental finance investments or large purchases. methods to dispose of pig waste. Lacking insurance, they cannot protect their Inadequate physical infrastructure. meagre assets and income against shocks Transportation is constrained by the lack of such as illness, drought or theft. And in the roads and supporting infrastructure. Water, absence of transactional banking services, electricity, sanitation and telecommunications their financing is insecure and expensive.

FIVE STRATEGIES AT WORK

Despite these challenges, a growing number business. The critical added ingredient: the of businesses are operating successfully in entrepreneur’s ingenuity. The report presents poor markets. The examples in this report tools and examples to stimulate and guide span a wide range of countries and industries. that ingenuity, highlighting constraints, Each featured business developed a specialized strategies and specific solutions for developing solution set, allowing it to succeed in its local inclusive business models. context according to its unique objectives. The Growing Inclusive Markets strategy Yet the case studies reveal common patterns. matrix relates the five broad constraints to Entrepreneurs respond to constraints by the five core strategies (figure 2), showing working around them or by removing them. how these strategies are most often applied: To do that, they use five core strategies: strategies highlighted in dark blue are used adapting products and processes, investing most often, those in light blue only rarely. to remove market constraints, leveraging the The strategy matrix can help entrepreneurs strengths of the poor, combining resources and analysts scan possible solutions to the and capabilities with other organizations and constraints they face. It is crucial to note that engaging in policy dialogue with government. successful inclusive business models typically These strategies are consistent with combine several strategies to address several the local context and objectives of each constraints. To get from broad strategies to

6 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR focused solutions, one must not only identify Invest to remove market constraints. each local constraint, but also understand Although removing market constraints its dynamics in the market—information might ordinarily be thought the province that allows a business model to build on a of government, companies with inclusive market’s specific strengths. business models often must take on this task themselves. Investing to remove constraints is Adapt products and processes. cost-effective for business when it creates— Many entrepreneurs work around market or can be made to create—private value that constraints by adapting business products and is tangible and capturable, ensuring sufficient processes. Information and communications benefits to the company. technologies have created the possibility for Denmor produces textiles in Guyana, many such adaptations, including mobile mainly for export to the United States. banking (m-banking), smart cards (such as Its key value proposition is flexibility: it those used in Africa to buy water) and can produce high-quality garments in small telemedicine, which brings quality health batches and deliver them fast. The company care to remote areas. M-banking has freed employs 1,000 people, virtually all of them banking processes from relying on brick- women from poor rural communities. Many and-mortar branches and automated teller cannot read or write when they start working machines, infrastructure that rarely exists with the company. Denmor teaches them at where poor people live. Customers can now least enough to write their names, count and wire money, receive remittances, pay for read labels and garment specifications. All purchases and service their credit, all employees are cross-trained, so that each can through their mobile phones. But businesses perform every step in production and all can are also using other technologies for respond better to rushed orders and tight water purification and off-grid electricity deadlines. Denmor also trains the women in production, to address constraints in industries health and hygiene and for personal empow- that meet basic needs. In addition, some erment. Beyond tangible and immediate innovative technological approaches are value, removing constraints—in knowledge, reducing the use of resources—tying the skills, infrastructure or access to financial goal of human development to that of products and services—can create intangible environmental sustainability. and longer term value through building Restructuring business processes can be brand image, employee morale, corporate as important as using new technologies. For reputation and the power to develop new example, the global spread of telephony is capabilities and strengthen competitiveness. driven by wireless technology. But bringing mobile telephone service to poor people has Such investments can thus be cost-effective. depended partly on a change in the business Investing to remove market constraints process—the move to selling air time on can create public as well as private value. prepaid cards. With ‘smart’ payment and For example, when a firm educates and pricing methods, an inclusive business model trains its employees it creates a more skilled can accommodate the cash flow of its customers workforce—a shared resource as workers and suppliers, who are constrained by low move on to other jobs and companies. and unreliable incomes and a lack of access This added social value opens up doors for to financial services. Similarly, providing cost-sharing with socially minded funding infrastructure to a group saves individual sources. Such sources—which can include household connection costs. And simplifying international donors, individual philanthropists, the requirements—by making products and nonprofit social investment funds and services easier to use, or by asking for less governments—enable the private sector to documentation—responds to the lack of share the cost of creating social value in knowledge and skills among the poor and to three ways: through grants and through their exclusion from formal registration. reduced-cost and ‘patient capital’.7

OVERVIEW: BUSINESS WITH THE POOR—CREATING VALUE FOR ALL 7 Figure 2. Growing Inclusive Markets STRATEGIES strategy matrix

Adapt Invest in Leverage Combine Engage products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government

Market information

Regulatory environment

Physical infrastructure CONSTRAINTS

Knowledge and skills

Access to financial services

Note: Dark blue indicates constraint-strategy combinations found in more than one in four cases where the constraint appears. Medium blue indicates combinations found in less than one in four, but more than 1 in 10 cases where the constraint appears. Light blue indicates combinations found in less than 1 in 10 cases where the constraint appears. Source: Authors’ analysis of data as described in text.

Leverage the strengths of the poor. Healthcare Foundation, supports the franchisees The poor are often an inclusive business with quality drug supplies, start-up financing, model’s most important partners. By engaging ongoing professional development and other the poor as intermediaries and building on central services, while franchisees operate the their social networks, a company can increase shops on their own account. access, trust and accountability. Those qualities Firms can leverage local knowledge and in turn help businesses to nurture their markets trust—two key assets for doing business in and expand participation in their value chains. poor communities—by employing the poor to One model for engaging the poor into one’s gather market information, to deliver, collect sales operations is microfranchising; an exam- and service products and to train others. ple is CFW, a microfranchise system of drug Furthermore, poor people often have the best shops and clinics in Kenya. Its franchisees ideas for creating new products and services are typically nurses or other health workers that meet other poor consumers’ needs. from the communities that the franchises Generally, when the poor take over some serve. The franchise provider, Sustainable tasks in a business model, the transaction

8 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR costs for the business fall—while the poor partner organizations fulfill all kinds of benefit from rising income, knowledge and functions along the value chain, from market skills and social standing. research to providing services. Central to leveraging the strengths of Collaboration can also mean pooling the poor is building on their social networks. resources to achieve a common objective. In A community is more than the sum of its India, access to credit for small and medium- parts. Where poverty prevails, formal laws sized enterprises was complicated by the and regulations are often less effective than fact-finding process: each bank had to assess the informal rules that communities set the risk of lending on its own. The high and enforce. Such informal rules can make cost of assessing applicants meant that banks inclusive business models viable. And a had no interest in dealing with loans below community can help its members to help a certain size or interest rate. Then several each other—for example, by sharing resources, banks, among them ICICI Bank and by co-operating to provide common goods Standard Chartered, joined to create the (such as wells, mills or schools) and by Small and Medium Enterprises Rating supplying an infrastructure for savings, credit Agency, which rates the creditworthiness of or insurance mechanisms. Businesses can such enterprises and provides the information count on these communal processes to fill to all participating banks. By reducing the gaps in the markets of the poor. cost of due diligence to any one bank, the service makes it profitable for banks to lend Combine resources and capabilities to smaller businesses and at lower interest with others. Like many business models, rates—increasing access to credit while inclusive business models often succeed by expanding the market for credit providers. engaging other businesses in mutually beneficial partnerships and collaborations. They Engage in policy dialogue with also make use of collaborations with nontra- governments. Engaging in policy dialogue ditional partners, such as nongovernmental is an important part of doing business with organizations and public service providers. the poor, where companies are typically first Through such collaborations, businesses can movers and much of the environment for gain access to complementary capabilities doing business has yet to be built. All five and pool resources to work around or remove market constraints identified in this report constraints in the market environment. are more or less in the domain of public By combining complementary capabilities policy. In many of the case studies, businesses with other organizations, inclusive business have found creative ways to work around or models can capture capabilities and resources remove the constraints—say, by adapting that a business could not provide alone. Brazil’s products to run on solar power, by investing Votorantim Celulose e Papel (VCP), a pulp in education and training to increase skills and paper company, wanted to provide its among the workforce, by leveraging social small-scale eucalyptus growers with access networks to enforce contracts or by joining to credit under repayment terms that would with other companies in self-regulation. match their cash flows (eucalyptus is harvested For other businesses, though, it proves less only after seven years). Since credit was not feasible to work around or remove constraints available on such terms, and since VCP had through private initiatives. Their usual strategy no interest in offering in-house credit services, is to engage in policy dialogue. Policymaking the company established a partnership with is complex and continual, and businesses can a bank, ABN AMRO Real. The bank now provide good information about the problems provides credit to the growers, with the loan and their possible solutions. secured by a guarantee from VCP to buy the Inclusive businesses often have fairly timber. The growers pay the loans back as limited goals, such as encouraging government the timber is harvested. In other examples, to provide the public goods or services they

OVERVIEW: BUSINESS WITH THE POOR—CREATING VALUE FOR ALL 9 need to operate in a particular location. In such cases, engaging with governments individually can be effective. Sometimes the individual efforts of entrepreneurs and companies can have larger implications, such as changing market structures or even opening new markets. Tiviski, a camel dairy in Mauritania, is an example: through the individual efforts of Tiviski’s founder, the European Union is creating a market for camel dairy imports where none existed before. Businesses can also rely on demonstration effects to promote the strengthening of regulations in developing countries that lack them, or where they are not effective. When the Rural Energy Services Companies started up in Mali, the country did not yet have a regulatory framework to cover private electricity provision. Through the companies’ actions—and with additional support from the World Bank—the Malian government established the required rules and procedures. Collective engagement by businesses is another way to inform public policy. Since business engagement in policymaking can be controversial, companies and

Figure 3. Growing Inclusive Markets strategy matrix and summary STRATEGIES of solutions

Adapt Invest in Leverage Combine Engage products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government

Leverage Ensure Engage Combine Engage Market technology private value the poor as complementary individually information individuals capabilities

§ Leverage § Do market information and research § Involve the §Acquire mar- poor in market ket information communications § Build technology research § Leverage infrastructure existing logistics § § Train the poor Regulatory Apply sector- § Improve networks to be trainers environment specific solutions supplier § Impart § Ensure performance § Build local knowledge logistics networks § Promote environmental § Raise sustainability training in Engage awareness § Establish needed skills through and train local service § Make sales, demonstration provide services consumers providers effects § Facilitate Physical Design § Build finan- § Co-create access to finan- infrastructure business cial products innovations with cial products processes or services the poor and services § Capture the intangible benefits Pool resources CONSTRAINTS § Adjust to Engage the cash flows communities: Knowledge of the poor build on existing social § Gather mar- and skills § Simplify Leverage networks ket information requirements social value Engage § Fill gaps collectively § Avoid adverse in market infra- incentives structure § Leverage § Self-regulate § Make § Use grants informal contract § Build knowl- operations § Finance enforcement edge and skills Access more flexible to financial with reduced mechanisms § Increase services § Provide cost or patient § Expand access to finan- to groups capital cial products risk sharing and services

10 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR policymakers need a space to engage in frank yet transparent dialogue about how to improve the business environment. Collaborative efforts can open such a space. Companies operating in the same industry or region often share policy interests. And if they are doing business in ways that contribute to economic opportunity and human development, organizations outside the private sector may have complementary policy interests. Where business models are inclusive, collective action can give businesses a strong and legitimate voice in policymaking.

TAKING ACTION

How can a business leader develop an business models and to facilitate and inclusive business model? In a few words: lead dialogues for policy change. by responding to local conditions. The Building business in the markets of entrepreneurs behind the case studies the poor works best when all stakeholders featured in this report acted in this spirit. contribute their strengths. When this They identified opportunities, understood happens, inclusive business models will the contexts and found solutions with open proliferate and grow. Markets will include minds and much experimentation. more poor people. And value will be created The report encourages people in the for all—through profits, through increased private sector to be the main agents of incomes and through concrete progress change for human development. But the in human development. private sector cannot succeed alone. As The Growing Inclusive Markets important as the entrepreneurial spirit is strategy matrix and summary of solutions to business leaders, it is also important for (figure 3) lists ways to apply the five donors, policymakers, philanthropists and over-arching strategies for mitigating the leaders of public service and not-for-profit constraints faced by inclusive business organizations. They can partner with the models. More than one solution—and more private sector to fund investments in better than one strategy—are often used simultane- market conditions, to collaborate in operating ously to overcome a constraint.

1 World Bank 2007d. 2.6 billion is the figure for 2004 and less than $2 a day is in 1993 purchasing power parity dollars. 2 OECD and IEA 2006. 3 ITU World Telecommunication/ICT Indicators Database. Available at: http://www.itu.int/ITU-D/ict/statistics/ict/ 4 Chu 2007. 5 World Development Indicators Database. April 2007. 6 See Mendoza, forthcoming. 7 ‘Patient capital’ is a term used to describe an emerging set of investments that do not look for immediate financial return, but rather expect both financial and social returns over time.

OVERVIEW: BUSINESS WITH THE POOR—CREATING VALUE FOR ALL 11

PART I

OPPORTUNITIES TO CREATE VALUE FOR ALL Chapter 1 surveys the important opportunities in doing business with and for the poor. Businesses include the poor on the demand side, as clients and customers, and on the supply side, as employees, producers and business owners. Businesses can benefit from increased profitability, flexibility, innovation and long-term growth potential. The poor can benefit from the fulfilment of basic needs and from increased productivity, income and empowerment. We call such ways of doing business that build bridges between business and the poor for the benefit of both ‘inclusive business models’. Chapter 2 explains why these opportunities remain largely unrealized because of the market constraints that characterize poverty: a lack of market information, spotty regulatory environments, underdeveloped infrastructure, scarce knowledge and skills and limited access to financial services. These constraints have long been identified as major causes of persistent poverty. The Growing Inclusive Markets cases reveal that they are also important challenges to the development of successful inclusive business models.

14 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 1 OPPORTUNITIES FOR BUSINESS—AND FOR POOR PEOPLE

Egypt: The attractive- ness of the SIWA oasis offers a great opportunity for both the local community and the ecotourism business. Photo: SIWA

Many businesses are including poor people. That is good news for all. It is good news for the poor because, with poverty still intractable and widespread, large-scale solutions are needed. Of the world’s 6.4 billion people, 2.6 billion live on less than $2 a day.1 Billions lack access to even the most basic provisions of a good life. More than a billion lack clean water,2 and 2.6 billion lack adequate sanitation.3 Too many people remain stuck in fragmented, inefficient markets that limit opportunities to use resources productively. With appropriate frameworks and support from governments, the private sector is well-positioned to provide these opportunities on the required scale. That businesses can include the poor is also good news for business. Successful inclusive business models show that growth and innovation opportunities are emerging on both the demand and supply sides and that business can do much to capture—even create—those opportunities. By providing access to critical goods, services, jobs and incomes, businesses can help the poor become better

15 off; foster motivation and productivity show that the private sector provides health among producers and employees; and build a care for people from a wide distribution of base of loyal customers who move up the incomes, including poor and rural populations. income ladder. Businesses that include the In Ethiopia, Kenya, Nigeria and Uganda poor can both produce and reap the benefits more than 40% of people in the lowest of human development. economic quintile receive health care from That inclusive business models can private for-profit providers.6 create value for business and the poor Most poor people work and earn income reflects the truth that the poor are not sim- in the private sector, which generates more ply shut out of commerce and markets. The employment than the public sector. In Turkey, private sector is central to the lives of the the private sector generated 1.5 million jobs poor because all poor people are consumers, from 1987 to 1992—16 times more than and because most earn income in the private the public sector. In Mexico, it generated sector, whether by working for a business or 12.5 million jobs from 1989 to 1998—87 times by running one.4 more than the public sector.7 Moreover, many The private sector is already meeting poor people operate their own businesses. In poor people’s needs in many places, including Peru, 69% of urban households that live areas governments do not reach. In some on less than $2 a day per person operate a poor urban and periurban areas of India and nonagricultural business. In Indonesia, Sub-Saharan Africa, most schoolchildren Pakistan and Nicaragua, that figure is around use private schools; in rural India half of 50%. In rural areas, many poor people operate children do. In the poor urban and periurban a farm. In Pakistan, 75% of rural households areas of Lagos State, Nigeria, 75% of school- were self-employed in agriculture, in Peru, children are in private schools, in the periurban 69% and in Indonesia, 55%.8 district of Ga, Ghana, 64% and in the slums There is room for much more, and of Hyderabad, India, 65%. These low-budget much better, inclusion of poor people in private schools are usually run by local markets. Their use of markets can be very entrepreneurs, employing local teachers.5 limited, with little competition and low Similarly, the private sector is sometimes the efficiency and productivity. Businesses that only option for health care in rural regions open the markets of the poor with innovative and poor urban slums. Studies consistently models can realize pioneer benefits.

OPPORTUNITIES FOR BUSINESS: PROFITABILITY AND GROWTH

Building inclusive business models requires national companies that venture into the entrepreneurship. Entrepreneurs perceive markets of the poor. In Ghana, Barclays opportunity and take advantage of it. They Bank worked with local money collectors to come from all different backgrounds. Some reach the poor who were not in the formal start companies; others push for change and financial sector. And Brazilian food giant innovation in existing organizations. And Sadia transformed the lives of its small swine many companies have business development suppliers by monetizing carbon emissions processes or other special systems to from swine. All these entrepreneurs also capture opportunities. include small and medium-sized local The entrepreneurs in the case studies companies and cooperatives, such as DTC presented here include developing and developed Tyczyn, a cooperative offering telecommuni- country multinational corporations and large cations services in the poorest, most remote

16 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Mozambique: Women no longer spend hours fetching water from the areas of Poland; Tiviski Dairy, Africa’s first river. Photo: Adam Rogers/UNCDF camel dairy company in Mauritania; and Denmor, a textiles company employing 1,000 people in Guyana. They even include nonprofit organizations, such as the HealthStore Foundation, a microfranchise network of pharmacies in Kenya, and Pésinet, a child health delivery service in Mali. All these entrepreneurs pursue profit and social impact to varying degrees, but they also seek innovative solutions for financial sustainability and scale.

Generating profits and financial self-sustainability. Business with the poor can be profitable, sometimes even more profitable than business with the rich. The Narayana Hrudayalaya hospital group, a cardiac health care provider to the poor in India, earned a 20% profit in 20049—almost 4 percentage points more than the country’s largest private hospital—thanks to high patient volume and an innovative payment and financing scheme. Sulabh, a low-cost sanitation provider in India, posted a are designed primarily to address social $5 million surplus in 2005 from its earned problems. Yet financial self-sustainability— income strategy of building and operating achieved through entrepreneurial and public toilets and installing private toilets; earned-income strategies—allows them to its facilities were used by an estimated increase their reach and impact. Take the 10 million people in India. Smart Com- HealthStore Foundation, an international munications in the Philippines, a mobile nongovernmental organization, which phone banking company enabling overseas has quickly expanded by establishing a remittances and other services, became microfranchising distribution business that country’s leading telecommunications model. Its CFW shops combine established provider with a business model based on microenterprise principles with proven the mission ‘to make mobile phones as franchise business practices to provide affordable and accessible to as many Filipinos essential drugs and basic health services to as possible.’10 Of Smart’s revenues, 99% communities. Through its 64 outlets across came from prepaid cards in 2006. In 2003, Kenya, the HealthStore Foundation serves with a net income of about $288 million, some 400,000 patients each year.13 Smart was the year’s most profitable of the 5,000 largest corporations in the Philippines.11 Driving innovation. The motive for And microfinance institutions have already doing business with the poor is not always proved their high potential for above-market immediate profitability. Sometimes it is profitability, in some cases earning more longer-term growth and competitiveness. than a 23% return on equity.12 That is particularly true for large firms, At other times, profitability is a means including foreign multinationals, for which rather the primary objective. Many inclusive doing business with the poor can foster business models, such as those formed by civil innovation—a must for companies to society organizations and social entrepreneurs, compete and grow.

CHAPTER 1. OPPORTUNITIES FOR BUSINESS—AND FOR POOR PEOPLE 17 Figure 1.1. The global income pyramid

30,000

20,000

10,000 Annual per capita income in US$ (measured in 2002 PPP) in US$ (measured per capita income Annual 0 010203040 Share of world population (%)

Source: Based on Milanovic 2002.

For large firms entering the unfamiliar Developing new markets. Pioneering markets of the poor—and sometimes engaging work on the ‘bottom of the pyramid,’ local actors—can spur innovation in two by C.K. Prahalad and others,17 has shown ways. First, to increase affordability and fit that the poor can be a significant market for poor people’s preferences and needs, firms certain goods and services in many countries.18 must develop new combinations of price The distribution of global income is heavily and performance.14 Second, the deep and weighted towards low-income segments. pervasive constraints that firms meet when What is often termed an income ‘pyramid’ doing business with the poor—from trans- actually looks more like an antenna with an portation difficulties to an inability to enforce overly broad base (figure 1.1). Within that contracts—require inventive responses. base 4 billion people, roughly two-thirds The products, services and business models of the world’s population, live on less than that result can be successfully transferred $8 a day. Although their incomes are small, to developed markets, attracting consumers many small incomes together equal a large there. For example, fingerprint-enabled sum: about $5 trillion, nearly the gross automated teller machines developed for national income of Japan, the world’s illiterate banking customers in India are second largest economy. 19 being introduced in the United States, where Expanding into poor markets allows they increase security and convenience.15 firms to capture market share in a growing Large companies that do not compete for economy. And it allows them to build brand low-income customers risk ‘innovation recognition and loyalty with a growing blowback’ if they ignore how innovations customer base. Engaging poor markets can can move from the markets of the poor also provide a ‘license to operate’ from the into higher-income markets.16 local community or the country at large, and

18 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR engaging with local stakeholders can contribute grounds. Thoroughly training them led the to the long-term political and economic company to a niche in high-quality, highly stability of the business environment. flexible production chains. Industries such as Base-of-the-pyramid markets vary food, fashion and tourism can also draw on significantly across locations and sectors. the cultural skills of the poor as employees, The Next 4 Billion, a groundbreaking publi- developing products with unique value cation by the World Resources Institute propositions for higher-income consumers— and the International Finance Corporation, both in home markets and through export details the size of these markets across channels abroad.21 And for businesses sectors (figure 1.2), regions and countries. targeting poor consumers it can be smart However, all base-of-pyramid markets suffer to employ poor people as sales, maintenance from unmet needs for goods and services. or collection personnel—allowing the Rich people have countless ways to spend businesses to leverage their local knowledge their money, poor people very few; yet the and connections. poor are able and willing to pay for basic goods and services, often at a higher price. Strengthening supply chains. Many People in the slums of Jakarta, Manila and firms now buy significant shares of their Nairobi pay 5–10 times more for water than inputs of both goods and services from other people in high-income areas of those cities— firms. Incorporating the poor into business and more than consumers in London or value chains as agricultural producers or as New York.20 The ‘poverty penalty’ is similar goods and services suppliers widens the in credit, health care and electricity supply. scope for firms in developing countries to Some inclusive business models serve reduce costs and improve flexibility through longer-term strategic interests in generating local procurement. And that scope widens as demand and building new markets. Tsinghua local businesses upgrade to more specialized Tongfang, a Chinese computer company or higher-skill activities, such as component expanding the rural computer market, is production or business services.22 developing software and hardware solutions With most of the world’s poor working for 900 million Chinese farmers, offering in agriculture, businesses are exploring how targeted benefits such as information on to reduce the cost and increase the quality, weather and productive yield methods for diversity and consistency of agricultural farmers. Jun Li, vice-general manager of the product supplies by computer department, explains: ‘From our working with market research, we believe that what farmers really need is not simply a cheap computer, Figure 1.2. How poor consumers spend their money but a set of solutions to problems that farmers face in their daily work and life. We really need to think how our computers can make 179 158 51 20 their life easier, rather than simply trying to make them buy our computers.’ Water 332 ICTWater ICT Enlarging the labour pool. Manufacturing Health 433 Health companies are moving or outsourcing Transportation Transportation Housing production to take advantage of lower labour Housing 927 Energy costs in poor countries. China and other 2,900 Energy Asian countries have become the assembly OtherOther lines of the world. With training, moreover, FoodFood poor people can deliver high-quality products.

Denmor Garment Manufacturers in Guyana Note: Poor consumers are here defined as people living on less than $8 a day. employs mostly women from poor back- Source: Adapted from Hammond and others 2007.

CHAPTER 1. OPPORTUNITIES FOR BUSINESS—AND FOR POOR PEOPLEE 19 small-scale farmers. Such businesses range countries can also offer unique advantages, from global giants to large national firms such as biodiversity, with rare, high-quality and to smaller local enterprises. The South products awaiting discovery. The Brazilian African multinational SABMiller sources cosmetic company Natura built its high-end sorghum for its Eagle Lager from about product line, Ekos, around natural ingredients 8,000 small-scale farmers in Uganda used by traditional communities. And some and 2,500 in Zambia, working through consumers are willing to pay more to support cooperatives, commodities brokers and producers in developing countries. Though still nongovernmental organizations to transfer small, the fair trade sector is growing quickly. agricultural knowledge and business skills.23 Its total retail value was estimated at €1.6 Working with farmers in developing billion in 2006—up 42% from 2005.24

OPPORTUNITIES FOR THE POOR: IMPROVED HUMAN DEVELOPMENT

Doing business with the poor improves and thus suffer from diarrhoea and other their lives. Poverty is best understood not preventable illnesses, the women in Guyana simply as a lack of income, but more funda- who cannot read and write and are unable to mentally as a lack of meaningful choices. find formal employment. All these people Mahubul Haq, founder of UNDP’s Human are poor. Development Report, a series issued annually Poverty is multidimensional. At its core since 1990, explains: ‘The basic purpose of is the lack of opportunity—or, in the words development is to enlarge people’s choices. of Indian economist Amartya Sen, the In principle, these choices can be infinite inability to choose a life ‘one has reason to and can change over time. People often value value’.26 Causing this lack of opportunity achievements that do not show up at all, or are not only a lack of money or resources, not immediately, in income or growth fig- but also a lack of the ability to use resources. ures: greater access to knowledge, better Bad health, lack of knowledge and skills, nutrition and health services, more secure social discrimination, exclusion and limited livelihoods, security against crime and physi- access to infrastructure can hinder people cal violence, satisfying leisure hours, political from converting resources into opportunities. and cultural freedoms and sense of participa- Improving these can bolster both access tion in community activities. The objective to resources and the ability to transform of development is to create an enabling envi- resources into opportunities. Indeed, the case ronment for people to enjoy long, healthy studies show that doing business with poor and creative lives.’ 25 people can make them better off beyond The poor are not a homogeneous group. merely generating added income. They live different lives in different places, To be sure, market-based approaches with different goals and needs. The case cannot help all poor people escape poverty. studies show this diversity: the people living To transact in the marketplace, people need in the slums of Manila who get their water some resources and the ability to use them. from leaking pipelines far away from their The destitute need targeted support to help homes, the coffee growers in Colombia who themselves through the market. Bangladesh’s must fear the volatility of world market BRAC has long realized the difficulties in prices, the young people in South Africa addressing the needs of the extreme poor who cannot afford continued education to using conventional microfinance. To give improve their job market positions, the peo- poor people the necessary security and ability ple in India who have no access to sanitation to take advantage of loans, BRAC provides

20 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Box 1.1. Inclusive business models and the Millennium Development Goals The Millennium Development Goals, which translate the concept of human development as a multidimensional challenge into actionable objectives, give all UN agencies an overarching framework to measure progress in reducing global poverty. The Growing Inclusive Markets case studies show how inclusive business models are promoting progress towards the goals. Millennium Development Goal 1: Eradicate extreme poverty and hunger 1 In Colombia, the Juan Valdez company is offering higher, more stable incomes to over 500,000 small-scale coffee growers. In the Philippines, where coconut farmers are among the poorest people, CocoTech involves more than 6,000 families in cocofibre net production.

Millennium Development Goal 2: Achieve universal primary education 2 Tsinghua Tongfang (THTF) markets computers to China’s rural population that include distance education software, both for primary and middle school education and for minority language education. The minority language programme’s online video class- es, recorded in quality middle schools with minority students, allow THTF’s rural customers to learn in their own language. Millennium Development Goal 3: Promote gender equality and empower women 3 Financial institutions can promote gender equality and women’s empowerment by increasing access to finance—an important need for the many women microentrepreneurs in developing countries. In Russia over 80% of Forus Bank’s clients are women, most of them in retail businesses; in 2006 the bank helped create 4,250 direct and 19,950 indirect jobs. In the Democratic Republic of Congo, many women have gained financial autonomy by reselling Celtel mobile phone airtime. Millennium Development Goal 4: Reduce child mortality 4 In Mali, where in 2000 more than 22% of infants died before their first birthday, Pésinet is making a difference in the communities where it operates by providing an early warning method for monitoring the health conditions of children under age five from low-income families. In Saint Louis, Senegal, where Pésinet started, the infant mortality rate fell by more than 90% between 2002 and 2005—from 120 per 1,000 live births to 8. Millennium Development Goal 5: Improve maternal health 5 In Cabo Delgado, Mozambique, the liquefied petroleum gas provided by VidaGas improves the sterility of medical instruments used to deliver babies. Where most public clinics were once short of essential drugs, and most maternal deaths resulted from infection and haemorrhage caused by complications in pregnancy, today’s reliable fuel supply, cold chain for medicines and better distribution of medicines all improve maternal health. Millennium Development Goal 6: Combat HIV/AIDS, malaria and other diseases 6 In Tanzania, A to Z Textile Mills provides affordable, long-lasting insecticide-treated bed nets that prevent mosquitoes from spreading malaria, reducing deaths by 50%. In Kenya, in 2006, the 66 CFW Shops (drug shops and clinics) facilitated treatment of about 400,000 patients in rural areas and urban slums suffering from malaria and other diseases. Millennium Development Goal 7: Ensure environmental sustainability 7 In 57 small towns across Uganda, the Association of Private Water Operators provides over 490,000 people with water and sewage services. In the shanty towns of Casablanca, Morocco, Lydec has dramatically increased the percentage of people with access to water and electricity.

Millennium Development Goal 8: Develop a global partnership for development 8 In the Philippines, Smart is reducing the ‘digital divide’ by providing low-cost, prepaid mobile phone airtime cards and is easing financial transactions through the option to send remittances using short messaging service (SMS) technology. With a network covering over 99% of the population, Smart’s focus on the low-income market enables it to serve 24.2 million people.

CHAPTER 1. OPPORTUNITIES FOR BUSINESS—AND FOR POOR PEOPLE 21 Mexico: Amanco offers integrated irrigation systems to low-income small- scale lemon producers. Photo: Loretta Serrano

health care, water, sanitation and housing. In the Philippines, RiteMed, the newly formed generics division of pharmaceutical provider Unilab, reached more than 20 million low-income clients in 2006 with 35 generic drugs, selling them at prices 20%–75% lower than those of name brands. Construmex, a housing and finance the poorest with food support and skill provider, has helped more than 14,000 development training for a fixed period. Mexican immigrants to the United States With an average subsidy of $135 per woman, improve, build or buy houses for themselves or three-quarters of programme participants their families in Mexico, where an estimated became regular clients of BRAC’s microfinance 25 million people have inadequate shelter. programme, graduating into a situation And in Mali, rural energy companies set up where they can benefit from formal by Électricité de France and its partners 27 financial markets. provide electricity to rural areas with diesel Still, even the extremely poor can generators and solar home systems— benefit from significant spillovers as market eliminating kerosene lamps, improving functioning improves. Take the study by indoor air and reducing respiratory disease. Professor Robert Jensen from the University of Texas, looking at Kerala, India, where Increasing productivity. Inclusive fishers can purchase mobile phones and business models can increase the productivity benefit from real-time information on supply, of the poor through sales of production demand and pricing. The phones improve equipment, financial services and information their profits by about 8% and reduce prices and communications technology. Capacity by 4%, benefiting poor consumers. Even building among employees, producers and smaller-scale fishers who cannot afford the small business owners also boosts their phones benefit indirectly, as Jensen explains: productivity. And improvements in the ‘Rather than simply excluding the poor or business environment, such as a better less educated, the “digital provide” appears to regulations and infrastructure, lift all boats. 28 be shared more widely throughout society.’ In Mexico, Amanco sells small-scale lemon The businesses described in the case farmers water-efficient drip irrigation systems studies contribute to human development that offer higher absorption and allow in four ways: by meeting poor people’s basic continuous production for 8–10 months a needs, by helping them become more year. The company aims to raise farmers’ productive, by increasing their incomes annual yields from 9 tons per hectare to 25. and by empowering them. Through social entrepreneurs and farmer cooperatives, Amanco also builds capacity Meeting basic needs. Some of the case through training and facilitating access studies here address basic needs, such as food, to financing.

22 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Increasing incomes. Doing business with Contributing to human development poor people can allow them to increase their implies that the poor and, for that matter, income—both through higher productivity society at large are not harmed by a business and through new economic opportunities model. Unfortunately, some business models as employees, suppliers, distributors and deplete a community’s natural resources the like. With Amanco, these productivity while meeting the needs of immediate increases are expected to nearly triple farmer beneficiaries. But business with the poor incomes. In China, Huatai provides need not come at the environment’s expense. The case studies, as well as the work of the alternative sources of income for local tree United Nations Environment Programme farmers and significantly increases the and others in sustainable consumption and incomes of about 6,000 rural households. production, show how business models can Poor people’s higher incomes can set promote environmental sustainability and off economic multipliers within the local human development simultaneously.29 community, indirectly increasing the incomes of many others. In Poland, apart from the In Mali, the solar home systems used by the rural energy services companies jobs and information and communications (set up by Electricité de France and its technology services provided directly by DTC partners) emit 95% less carbon dioxide Tyczyn, the community benefited indirectly emissions than traditional energy sources from economic spinoffs that established new do, while their diesel generators emit businesses and boosted land values five-fold. about 85% less.

Empowering the poor. Doing business with In Trinidad and Tobago, Mt. Plaisir Estate Hotel is transforming a poor, rural village poor people empowers them demonstrably, into a vibrant self-sustaining community both as individuals and as communities. while protecting the environment and By raising awareness, by providing basic natural biodiversity (including the education, by including groups that have endangered leatherback turtle, a main been discriminated against and by conferring local attraction). The hotel collects new hope and pride, inclusive business biodegradable kitchen waste for use models can give people the confidence and on the hotel’s farm, which yields fruits, strength to escape poverty using their own vegetables and livestock for the resort. means. In Kenya, the loans provided by In Brazil, where food giant Sadia K-REP Bank, a commercial microfinance has provided biodigesters to its swine provider, are not only sources of investment or producers, pork breeding waste is working capital, but also of self-confidence transformed into a resource—producing and independence. biofertilizers and food for fish, providing Some inclusive business models a renewable source of energy and creating contribute to human development in all four additional revenue for farmers from the ways. Amanz’abantu, a water and sanitation sale of carbon credits. Environmental provider, is meeting basic needs in South Africa sustainability and poverty alleviation by providing clean water and sanitation to can go hand-in-hand. the rural poor. Becoming healthier helps the Cocotech, the Filipino company, transforms poor become more productive. Because women coconut husk waste into cocofibre nets that no longer spend hours fetching water from prevent soil erosion. Cocotech’s suppliers the river and can instead spend their time in (coconut farmers), processors, twiners productive activities, they are more able to and weavers (women in villages) and increase their income. Amanz’abantu further decorticator operators (men in villages) contributes to empowerment through its are overwhelmingly from the rural poor. ownership structure, with historically Cocotech grew from its start-up in 1993 to disadvantaged companies holding a a medium-sized enterprise with revenues significant portion of its shares. greater than $300,000 in 2006.

CHAPTER 1. OPPORTUNITIES FOR BUSINESS—AND FOR POOR PEOPLE 23 Box 1.2. Access to credit in Guatemala Consumer needs and business opportunities can be identified both nationally and locally. Access to credit in Guatemala tends to be highest in the southwest, nearest the Pacific coast and the country’s political and economic centre, including Guatemala City [1]. Banks play a fairly minor role in providing credit to Guatemalans, whatever their income [2]. Most borrowers in all income groups obtain credit through informal sources such as friends, relatives and neighbours.

Peten Peten

BELIZE BELIZE MEXICO MEXICO

PETEN PETEN

NOROCCIDENTE Alta Verapaz NOROCCIDENTE Alta Verapaz Huehuetenango Huehuetenango Quiche NORTE Izabal Quiche NORTE Izabal

NORORIENTE NORORIENTE Totonicapan Baja Verapaz Totonicapan Baja Verapaz San Marcos Zacapa San Marcos Zacapa El Progreso El Progreso Quetzaltenango Chimaltenango Quetzaltenango Chimaltenango Guatemala HONDURAS Guatemala HONDURAS Chiquimula Chiquimula SUROCCIDENTE METROPOLITANA Jalapa SUROCCIDENTE METROPOLITANA Jalapa

Retalhuleu Suchitepequez Retalhuleu Suchitepequez SURORIENTE SURORIENTE Escuintla Escuintla Jutiapa Jutiapa CENTRAL REGION Santa Rosa CENTRAL REGION Santa Rosa

EL SALVADOR EL SALVADOR [1] Market heat map: [3] Market heat map: Households living on Households living on more than $2 a day less than $2 a day Share of households with access Share of households with access to credit, by region, 2000 (%) to credit, by region, 2000 (%) 4 - 8 4 - 8 8 - 11 8 - 11 11 - 13 11 - 13 13 - 16 13 - 16

[2] Sources of credit: Households living [4] Sources of credit: Households living on more than $2 a day on less than $2 a day Share of households, 2000 (%) Share of households, 2000 (%) Urban Rural Urban Rural 100 100

80 80

60 No credit 60 No credit Shopkeeper, Shopkeeper, villager, relative villager, relative 40 or friend, other 40 or friend, other Money lender, Money lender, microcredit microcredit 20 institution, 20 institution, credit union credit union 0 Bank 0 Bank

24 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Such patterns can reveal opportunities to expand existing credit services or to provide new ones to people outside the market—though maps and figures are only a first step. To build a business case, more CRACKING THE CODE: research is needed on what is behind these access patterns. SUCCESSFUL EXAMPLES A closer look at the actual use of credit in OF DOING BUSINESS Guatemala provides more information and might strengthen the case for a business WITH THE POOR opportunity [5]. Only 19% of urban borrowers living above $2 a day use their loans for investment rather than consumption, Two well-known examples of ‘cracking 55% of rural borrowers living on less than the code’ to do business with the poor are $2 a day invest their loans in agricultural and other business. If formal credit is microfinance and mobile telephony. Both expanded for the rural poor and the show how inclusive business models can set distribution of spending remains the same, the loans will most likely be invested off a virtuous circle, improving people’s lives rather than consumed. and incomes and benefiting from the growth Again, more detailed context-specific that results. Both sectors, moreover, can still analyses are required to understand credit expand greatly by reaching out more broadly demand among the poor. But the market heat maps offer useful signposts towards within countries and more deeply into a better knowledge of these markets. low-income populations.

[5] Opportunity: Estimates of the use of credit in Guatemala among households living on less or more than $2 a day (2000)

Urban Households living on less than $2 per day

Rural

Urban Households living on more than $2 per day Rural

0 102030405060

Agriculture business, other business Housing, education, durable goods Nondurable consumption

Sources: Instituto Nacional de Estadistica de Guatemala. Maps produced by OCHA ReliefWeb.

CHAPTER 1. OPPORTUNITIES FOR BUSINESS—AND POOR PEOPLE 25 More borrowers waiting for microcredit. Microcredit was probably the first model to show that business with the poor can be profitable on a global scale. Not long ago, commercial banks considered lending to the poor unthinkable. Muhammad Yunus, the founder of Grameen Bank, recalls his first negotiations with banks in the early 1970s, ‘First thing I did was to try to connect the poor people with the bank located in the campus. It did not work. The bank said that the poor are not creditworthy.’30 What began with Grameen Bank and others as a socially minded nonprofit business has grown into an attractive commercial business. Grameen Bank now has 2,499 branches and serves 7.45 million borrowers in more than 80,000 villages (more than 97% of all villages in Bangladesh).31 Providing microfinance services to the poor is increasingly seen as an opportunity for growth and profitability. In Latin America in 2004, the financial returns of microfinance were substantially higher than for conventional banking; microfinance’s return on equity was 31.2%, that of conventional banking 16.5%.32 And the poor benefit: one in five borrowers from Grameen Bank moved out of poverty within about four years.33 Despite this progress, most poor people still lack access to credit. The growth of the microcredit industry was anything but slow—from 1997 to 2003 the total number of clients grew almost 500%34 —but even the industry’s new target for 2015, 175 million households,35 is only a small fraction of the population of developing countries.36 Figure 1.3. Mobile phone subscribers per 100 inhabitants, 2006

Africa

Asia

World

Americas

Oceania

Europe

0 20 40 60 80 100

Source: ITU 2006

Mobile telephony can reach further. Mobile phone service is expanding with breathtaking speed in developing countries (figure 1.3), where the industry is adding subscribers at twice the rate seen in developed countries.37 Africa’s market increased most rapidly over 2001–06, averaging about 50% annual growth. The continent had 198 million subscribers by 2006;38 by 2010 that number is expected to climb to 250 million.39 Despite the recent massive growth in mobile phone penetration, subscriber rates in Africa remain low. In 2006 there were 21.6 subscribers per 100 people, far fewer than the 41 per 100 people globally (box 1.3[1]). In Eritrea and Ethiopia fewer than 10 people per 1,000 subscribed to mobile phone service in 2005.

26 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Box 1.3. The booming market for mobile telephony in South Africa Again, looking closely at the country level can reveal business opportunities. Even though South Africa has a fairly advanced mobile phone sector, large por- tions of the country’s poor population lack access (see [1] and [2]). In urban areas, 43% of households living on less than $2 a day have access to a mobile phone, but in rural areas, only 31% do. Households living on more than $2 a day are only slightly better off: in urban areas 56% have phone access, in rural areas 38%. And access varies widely across regions. Cell phone penetration is generally strongest in the west and weakest in the central part of the country. Free State has the greatest disparities: at least 40% of people earning more than $2 have mobile phone access, but fewer than 20% of those earning less than $2 a day do. Studying why access varies so much among regions and among income groups could yield new opportunities to close access gaps.

ZIMBABWE ZIMBABWE

BOTSWANA UE BOTSWANA

Northern Province Northern Province NAMIBIA Limpopo NAMIBIA Limpopo

MOZAMBIQ MOZAMBIQUE

Mpumalanga Mpumalanga Gauteng Gauteng North-West SWAZILAND North-West SWAZILAND

Free State Kwazulu-Natal Free State Kwazulu-Natal

Northern Cape LESOTHO Northern Cape LESOTHO

Eastern Cape Eastern Cape

Western Cape Western Cape

[1] Market heat map: Households [3] Market heat map: Households living on more than $2 a day living on less than $2 a day Share of households with access Share of households with access to cell phone, by region, 2000 (%) to cell phone, by region, 2000 (%)

0 - 20 0 - 20 21 - 40 21 - 40 41 - 60 41 - 60

61 - 80 0 100Km 61 - 80 0 100Km

[2] Access to a mobile phone in South Africa: [4] Access to a mobile phone in South Africa: Households living on more than $2 a day Households living on less than $2 a day Share of adults, 2000 (%) Share of adults, 2000 (%) Urban Rural Urban Rural 100 100

80 80

60 60

40 40

20 Do not have 20 Do not have

0 Have 0 Have

Source: Based on FinScope 2006. Estimates for mobile phone access are taken from the survey category ‘personally make use of…prepaid cell phone’. In South Africa as in many African countries, prepaid is often the only or most-used option. Maps produced by OCHA ReliefWeb.

CHAPTER 1. OPPORTUNITIES FOR BUSINESS—AND POOR PEOPLE 27 1 World Bank 2007d. 6.4 billion people is the figure for 2005, investment and job creation, short- and long-term 2.6 billion the figure for 2004, and less than $2 a day is in approaches to building the labour force’s capacity to fill 1993 purchasing power parity dollars. those jobs, the need for mechanisms to help workers move up the ladder into more skilled, better-paid jobs 2 World Bank’s World Development Indicators database and the debate over fair wages and labour standards. (http://devdata.worldbank.org/external/CPProfile.asp? While this report does not attempt an exhaustive treat- CCODE=JPN&PTYPE=CP). ment of this broad area, several of the case studies 3 World Bank’s World Development Indicators database. address these issues. 4 See, for example, Banerjee and Duflo 2007. 22 Jenkins 2007, p. 15. 5 Tooley 2007. 23 Jenkins and others 2007. 6 IFC 2007. 24 Fairtrade Labelling Organizations International 2007. 7 Klein and Hadjimichael 2003. 25 UNDP Website “The Human Development Concept” 8 Banerjee and Duflo 2007. (http://hdr.undp.org/en/humandev/) 9 Profit in this example is noted as earnings before interest, 26 Sen 2001. depreciation and taxes. 27 Fazle and Matin 2007. 10 See Ganchero, Elvie Grace. 2007. Smart Communications: 28 Jensen 2007. Lowcost Money Transfers for Overseas Filipino Workers. UNDP 29 UNEP 2001. See also initiatives such as SEED 11 Loyola 2007. (www.seedinit.org) or AREED (www.areed.org). 12 Chu 2007. 30 Yunus 2003b. 13 Christensen and Hart 2002;Christensen,Craig, and Hart 31 Grameen Bank Website (www.grameen-info.org). 2002. 32 Chu 2007. 14 Prahalad 2004. 33 Khander 1998. 15 Kahn 2008. 34 Australian Bureau of Statistics n.d. 16 Brown and Hagel 2005. 35 Associated Press 2006. See also The Microcredit Summit 17 The distribution of wealth and the capacity to generate Campaign Phase II Goals (www.microcreditsummit.org). incomes in the world can be captured in the form of an 36 The sector is severely constrained by a lack of capital. As economic pyramid. At the top of the pyramid are the some microcredit organizations evolve from nonprofit wealthy, with numerous opportunities for generating high organizations into commercial banks, their access to capi- levels of income, and at the bottom people living on less tal markets and complex financing instruments grows. than $2 a day (Prahalad 2004). Commercial investors in search of market-equivalent 18 Hammond and others 2007; Prahalad 2004; Prahalad and returns may initially adversely affect financial inclusiveness Hart 2001 ; Prahalad and Hammond 2002; Hart 2004. through high interest rates, but the increased investment 19 World Bank’s World Development Indicators database capital allows an expansion of essential infrastructure and (http://devdata.worldbank.org/external/CPProfile.asp? increases access. Additionally, the prospects of competi- CCODE=JPN&PTYPE=CP). tion in these markets may also drive interest rates down for the poor eventually. 20 UNDP 2006. 37 Ivatury and Pickens 2006. 21 Much work has been done—and is being done—on direct employment by businesses in developing countries. The 38 ITU statistics n.d. literature covers public sector strategies for incentivising 39 Ivatury and Pickens 2006.

28 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 2 CONSTRAINTS STANDING IN THE WAY

The Philippines: By taking over water operations from the Filipino government, Manila Water faced challenging hurdles due to poor law enforcement. Photo: Manila Water

Market conditions in poor areas can often look bad for business. Functioning, well-developed markets have adequate infrastructure, steady flows of information and a regulatory environment that is friendly to business while limiting downsides. Market participants have skills, knowledge and access to financial products and services. But where poverty prevails, most of these factors are lacking—excluding poor people from meaningful participation in markets, and excluding businesses from the markets of the poor. The case studies in this report show how these limitations can affect businesses trying to engage the poor. They illustrate five general constraints: Limited market information. Businesses know too little about poor people— what they prefer, what they can afford and what products and capabilities they have to offer as employees, producers and business owners. Ineffective regulatory environments. The markets of the poor lack regulatory frameworks that allow business to work. Rules are not enforced. People lack

29 Box 2.1. Overlapping market constraints in Guatemala

Given geography’s importance in wealth disparities, inclusive business models must analyse the poor’s access to goods and services geospatially. A closer look at access to credit in Guatemala shows how regional constraints in market environments might affect market access (see box 1.2). Because the country’s road network remains largely underdeveloped, with only about 1.2 kilometres of paved road per 1,000 people, many of Guatemala’s poor rural villages are fairly isolated. (By comparison, Costa Rica, with a population about half of Guatemala’s, has about 11.1 kilometres of road per 1,000 people.) Overall, 13% of Guatemalan households lack access to motorable roads. But this figure rises to almost 20% for households in

Peten the north, northwest and northeast, among the poorest in the country.1 BELIZE MEXICO In this example two constraints seem to overlap: physical infrastructure and PETEN access to credit. The same patterns will likely appear for other constraints, such as market information. In the markets of the poor, the constraints can accompany and reinforce each

NOROCCIDENTE Alta Verapaz other: roads reach out to areas with Huehuetenango more economic activity, and where Quiche NORTE Izabal roads exist, the economy grows. NORORIENTE Other areas are left out. These inter- Totonicapan Baja Verapaz San Marcos Zacapa locking constraints can create severe El Progreso Quetzaltenango Chimaltenango challenges for the poor and for Guatemala HONDURAS Chiquimula businesses alike. SUROCCIDENTE METROPOLITANA Jalapa

Retalhuleu Suchitepequez SURORIENTE 1. World Bank 2003. Escuintla Jutiapa CENTRAL REGION Santa Rosa

EL SALVADOR Sources of credit available to households Market heat map: Overlay of living on less than $2 a day, 2000 (%) poverty levels and roads and access to credit among households living on Urban Rural less than $2 a day in Guatemala (%) 4 - 8 100

4 -8 8 - 11 8 -11 11 - 13 80 025Km 11 13- 13 - 16 13 - 16 60 No credit 025Km Shopkeeper, villager, relative 40 or friend, other

Note: Black lines in the map represent asphalt roads. Money lender, microcredit Source: Based on Instituto Nacional de Estadística de 20 Guatemala 2000 and Henninger and Snel 2002. Map institution, produced by OCHA ReliefWeb, 5 February 2008. credit union 0 Bank

30 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR access to the opportunities and protections businesses? And how might each constraint afforded by a functioning legal system. affect the development of inclusive business models? Unleashing Entrepreneurship showed Inadequate physical infrastructure. that ‘building a sound private sector requires Transportation is complicated by the lack a strong foundation in the global and domestic of roads and supporting infrastructure. macro-environments, physical and social Water, electricity, sanitation and tele- 2 communications networks are lacking. infrastructure and rule of law’. It identified access to finance, skills and knowledge and a Missing knowledge and skills. level playing field for business as the pillars of Consumers may not know the uses and entrepreneurship. The case studies discussed benefits of particular products or may here confirm those findings: entrepreneurship lack the skills to use them effectively. is severely hampered when the conditions for Suppliers, distributors and retailers functioning markets are missing. may lack the knowledge and skills to Rural villages and urban slums deliver quality products and services are the primary market environments Moldova consistently, on time and at a set cost. of the poor. Globally, rural poverty Photo: UNICEF/ Julie Pudlowski Restricted access to financial products accounts for nearly 75% of extreme and services. Lacking credit, poor poverty (a per capita income of less producers and consumers cannot finance than $1 a day). But poverty also exists investments or large purchases. Lacking in cities, where it is concentrated in slums. insurance, they cannot protect what One city dweller in three, or 1 billion people, meagre assets and income they may have lives in a slum.3 against shocks, such as illness, drought In these contexts, structural challenges and theft. And lacking transactional keep the poor and businesses from realizing banking services, they face insecure and their mutual opportunities. The constraints expensive financial management. typically coexist, often reinforcing one another. For example, market information depends on Long identified as major causes of existing physical infrastructure for its flow and persistent poverty, these constraints have on knowledge and skills for its interpretation. been discussed extensively in the develop- Similarly, financial services require that rules ment literature.1 But how do they appear to and regulations be enforced.

MARKET INFORMATION

Entrepreneurs often lack detailed information about markets in poor areas, especially rural ones. These areas frequently lack intermediaries—such as market research or rating services—to consolidate or distribute such information, making it difficult to assess the viability of business ventures. For example, when Tsinghua Tongfang sought to build a computer for rural households, it did not know the specific agricultural software that would be most useful to consumers. It developed a website with batch capability, for an online community of open-source coders, farmers and agricultural experts. Similarly, when Barclays Bank started its business line for low-income clients in Ghana, the bank had difficulty finding information on the banking services those clients demanded, the volume of their savings and credit needs and the prices they would be willing to pay. Now, with more information about the customers’ banking needs, Barclays is better able to develop marketable products—and to price-in premiums and manage risk more effectively. Only by overcoming information asymmetries about pricing, quality and sizing needs of the poor will businesses succeed in these markets.

CHAPTER 2. CONSTRAINTS STANDING IN THE WAY 31 Box 2.2. Market heat maps REGULATORY ENVIRONMENT

A lack of accessible information about the poor and the Regulatory systems in poor areas are places where they live is one of the main constraints on inclusive business models. National statistical offices, often not developed enough to support development banks and donors have information from business entry, growth or development. In household surveys and market studies—but it remains buried Poland, the utility company Luban struggles in databases. Making such information more readily accessible with the absence of a coherent policy frame- can reduce the uncertainty of entering these markets. work to support bioenergy development, Market heat maps illustrate how much the poor participate including better integration of energy and in markets. They show access to goods and services in agricultural policies. VidaGas, an energy selected sectors and countries, and they show how the goods and services are provided. Behind the maps lies a company in Mozambique, needs a regulatory rich literature and extensive practice in poverty mapping. framework to ensure consumer safety and The maps also complement ongoing efforts to obtain quality control—a change that would send detailed data on low-income consumers—for example, an important signals to investors and other Inter-American Development Bank initiative to compile companies—in order to fully establish country-specific information on income groups in Latin American and the Caribbean, and a report by the International liquefied petroleum gas as an alternative Finance Corporation and the World Resources Institute that fuel in its market. highlights the market opportunity represented by the poor Regulations in developing countries and near-poor. (Hammond and others 2007.) often contain too much red tape. Complying An analytical tool, the heat maps provide detailed with them takes time and money, imposing information on the nature and composition of markets excessive opportunity costs, while payments— pertinent to human development. Their visually compelling such as registration and licensing fees— combination of information allows for a quick read of market inclusiveness and helps to: impose significant direct costs. In Senegal, bureaucratic barriers and an unsupportive § Reveal unmet demand for the poor as consumers and unrealized opportunities for the poor as producers. business environment required Chaka Market heat maps show how much the potential consumers Money Express and its affiliates to go for a good or service have (or have not) been reached. They through cumbersome legal procedures to indicate how inclusive markets are for different consumer acquire money-transfer licenses. groups, poor and nonpoor. That information can be translated into unrealized opportunities for expansion and innovation It can be much more time-consuming in product and service delivery. In addition, the maps show and expensive to open a business in regions how the poor are marginalized on the supply side of markets, with higher proportions of developing reflecting unrealized opportunities both for poor people countries (figure 2.1). In Latin America and and for society as a whole. the Caribbean, opening a business takes an § Assess market inclusiveness. Market heat maps can average of 73 days and costs about 48% of shed light on market inclusiveness along spatial dimensions, such as geographic regions, urban versus rural and the like— per capita income, while in Organisation for pinpointing unrealized opportunities. Economic Co-operation and Development § Clarify the supply structure. Market heat maps can countries, it takes on average just 17 days also illustrate supply structure, showing the presence and and about 5% of per capita income. relative market shares of different suppliers. Suppliers can Many developing country businesses be differentiated by ownership (public, nongovernmental operate informally because they cannot organizations, private), size (multi-national corporations, micro, small and medium-sized enterprises) or any other afford to comply with regulations. As relevant criterion. UNDP’s Legal Empowerment of the Poor Initiative has pointed out, economic policies and commercial law in most developing countries usually have been geared to large enterprises, excluding vast numbers of poor

32 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure 2.1. Average time and cost to open a business, by region

Duration (days) Procedures (number) Cost (% of GNI per capita)

Sub-Saharan Africa

South Asia

OECD

Middle East and North Africa

Latin America and the Caribbean

Europe and Central Asia

East Asia and the Pacific

0 20 40 60 80 0246 8 10 12 0 50 100 150 200

Source: World Bank Doing Business database. business owners. Poorer business owners which laws are habitually broken and not rarely benefit from formal legal structures.4 enforced. In such situations, even large Informality, however, creates problems for enterprises can find it difficult to handle business links. Formal companies find it major undertakings. When Manila Water difficult to procure products and services took over water operations from the from informal organizations without binding Philippine government, it incurred substan- contracts. And banks and financial services tial losses initially because water from the find it difficult to work with poor people pipelines was regularly stolen and sold. who cannot document their identity. Environments of insecurity and crisis are Even more challenging than inadequate certainly among the most challenging regulatory environments are situations in for business.

PHYSICAL INFRASTRUCTURE

A lack of physical infrastructure adds substantially to the high transaction costs of doing business with the poor. Especially in rural areas, but also in urban slums, poor people often lack connections to important transportation or data transfer networks. Other missing infrastructure includes logistics, dams and irrigation, water and electricity supply and sanita- Democratic Republic of Congo: Rural areas often tion and waste collection.5 lack infrastructure that provides poor people with access to water and sanitation. Photo: UNICEF/Julie Pudlowski

CHAPTER 2. CONSTRAINTS STANDING IN THE WAY 33 Many people in developing countries are not connected to functioning roads. The 53 countries classified as low-income by the World Bank have 239,000 kilometres of roads, while the 60 high-income countries Vietnam 6 Photo: Adam Rogers/UNCDF 3.6 million kilometres. When Celtel deployed its telecommunications network in the Democratic Republic of Congo, only one of the country’s ten provincial capitals was accessible by road, three by river and six by air. When EQI founded the Siwa Sustainable Development Initiative in Egypt’s western desert, it faced higher costs and logistics complicated by the isolation and inaccessibility of the oasis. In Mauritania, where the camel dairy Tiviski was founded, roads were missing, as was the logistics infrastructure for dairy production in a hot desert climate (such as collection hubs with refrigeration). According to the World Bank’s Investment Climate Assessments, physical infrastructure is a major obstacle to business operation and growth in regions with higher proportions of developing countries (figure 2.2).7

Figure 2.2. Businesses see infrastructure as a serious constraint

Sub-Saharan Africa

South Asia

Middle East and North Africa

Latin America and the Caribbean

Europe and Central Asia

East Asia and the Pacific

0 10 20 30 40 50 60

Note: Figure shows the share of firms that report the use of electricity, telecommunications or transportation as ‘major’ or ‘severe’ obstacles to the operation and growth of their business. Source: Based on The World Bank 2004 Investment Climate Surveys.

34 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Box 2.3. Market constraints affect market structure: Haiti’s water market Constraints in the market environment affect market structure. Small and informal providers often serve areas where larger, formal enterprises will not operate because of high costs. Take Haiti’s water market. Water distribution depends heavily on a functioning infrastructure, but building an extensive network of pipelines is expensive. Haiti is one of the world’s 50 least developed countries, ranking 146 of 177 countries on UNDP’s human development index.1 In 2001, 78% of Haiti’s total population—and about 86% of its rural population— lived on less than $2 a day.2 Low economic growth, natural disasters, political instability and poor governance have eroded basic public services.3 As the heat map shows, access to piped water networks is generally very limited: only about a third of Haiti’s urban poor and fewer than a third of its rural poor have access.4

The lack of functional infrastructure and piped water delivery has resulted in a vibrant ‘other’ water market, at least in urban areas. There the 45% of the population living on less than $2 a day has access to water from trucks, bottled water and water by bucket—services typically provided by small, informal vendors.

The same trend appears in many other countries where water provision through pipelines is lacking or nonexistent. Recent Cuba estimates suggest that more than 1 billion people, or about a sixth of the world’s population, lack access to improved water North West sources. Tapping the ‘other’ private sector North could be a practical way to increase access North East to safe drinking water.

Antibonite 1. UNDP 2007. 2. World Bank 2006, 2007a. 3. World Bank Centre 1998. 4. These figures may differ from those quoted in other literature, mainly because of the different units of analysis and methodology. 5. UNDP 2006; World Bank 2007a. Data on access to an improved water source refer to the percentage of the population with reasonable Dominican access (availability of at least 20 litres per person per day West Grand Anse Republic within 1 kilometre of dwelling) to an adequate amount of water from a source such as a household connection, public standpipe, borehole, protected well or spring and South South East rainwater collection. Unimproved water sources include vendors, tanker trucks and unprotected wells and springs.

Market heat map: Sources of water available to households Access to water in Haiti (%) living on less than $2 a day, 2001 (%) Households with a per capita income of less than $2 a day, 2001 Urban Rural 1 - 5 100 6 - 10 1 - 5 11 - 15 6 - 10 16 - 20 0 100Km 11 - 15 80 16 - 20 60

Note: Access to water includes access both to private piped water (inside and outside 40 Hole, river or lake, the house, including from wells inside the rainfall, other house) and to public piped water. Darker shades represent greater access. Trucked water, Source: Based on Institut Haïtien de 20 bottled water, Statistique et d’Informatique 2001. water by bucket Map produced by OCHA ReliefWeb. 0 Piped water

CHAPTER 2. CONSTRAINTS STANDING IN THE WAY 35 KNOWLEDGE AND SKILLS

Knowledge and skills are essential for the their demand for such products is low—until poor to be included in markets as consumers, they learn how to benefit from them. As employees and producers. But poor people Jun Li, vice-general manager of the Tsinghua often have limited education or access to Tongfang computer department, said, information. Formal education among the ‘The first thing we have to do is to let poor, especially the rural poor, is extremely farmers know that computers are useful, low. In the least developed countries, only and the second thing is to teach them how 53% of those over age 15 are literate.8 Years to use a computer.’ of schooling vary widely, but the quantity Gaps in human capital and skills can and quality of education are generally also limit poor people’s productivity as significantly lower among the poor. employees, preventing them from becoming Moreover, the ‘digital divide’ is wide: only successful producers in their own right. 4% of Africans had access to the Internet in When people lack basic skills and knowledge, 2005, while many do not even have a radio.9 businesses have difficulty ensuring good As consumers, poor people may not rec- production standards. The Integrated Tamale ognize or be able to leverage a product’s use Fruit Company produces certified organic or value. In the example of Tsinghua mangoes with outgrowers in Ghana, but when Tongfang, people in rural China are not the business started, farmers were not familiar accustomed to using and benefiting from with organic farming standards and could not computers and other technological tools, so consistently meet high quality standards.

Figure 2.3. Insurance penetration is low in most developing countries

Insurance premiums (% of GDP)

United States

South Africa

Philippines

Nigeria

China

India

0 2 4 6 8 10 12 14 16

Source: Swiss Re 2007 for the United States, Sigma Insurance for emerging markets.

36 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Box 2.4. Microinsurance Overcoming constraints can in India be a business opportunity. ACCESS TO Poor people’s lack of access to insurance, for example, can FINANCIAL SERVICES mean a huge market for businesses that find ways to surmount obstacles. A recent study by UNDP’s Financial products and services reduce risk Human Development Report Unit found that about 5 million people in India—just 2% of the country’s and transaction costs and create stability. poor—have insurance. The study estimated the Credit and insurance reduce vulnerability market’s potential size at $1.4–$1.9 billion (for life and allow businesses to seize opportunities. and nonlife services). Innovative business models Savings and transactional banking services are emerging to capture this large market. In India, help manage resources more efficiently. Innovative Rainfall-Indexed Insurance is a pilot Improved access to basic financial services is funded by the World Bank and initiated by Krishna especially critical for emerging and potential Bhima Samruddi Bank. Its insurance payments entrepreneurs—and, by extension, for larger depend solely on weather conditions, without any required loss assessments. or better-established businesses to buy from or sell to those entrepreneurs. Source: UNDP 2007. Credit enables small and medium-sized enterprises to enter the marketplace, scale up Insurance is a business that facilitates production, upgrade technology and change other businesses. People who can buy insurance, or improve their products and services.10 and thus control the risk of losses, are freer For example, without easy access to credit it to make long-term investments. In addition, is difficult for farmers to buy the small-scale, banks are more willing to provide credit to high-efficiency drip irrigation equipment customers with insurance. A lack of insurance Amanco offers in Mexico, even though it is one reason why producers find it hard to would nearly triple their yields. According enter contracts with long-term paybacks. to the United Nations Conference on Trade In Brazil, VCP sought to include poor and Development, ‘Finance has been identified farmers in the production of timber for in many business surveys as the most important paper production. But the trees could be factor determining the survival and growth harvested only after seven years. Without of [small and medium-sized enterprises] in insurance against natural disasters, the farmers both developing and developed countries.’11 would risk losing their whole investment. Access to credit in developing countries Savings and transactional banking reduce is still much lower than in developed countries. costs and expand markets over time by allowing Private credit as a percentage of gross people to make credible commitments. domestic product is 85% in high-income Without accessible banking, trading with the countries, 30% in upper-middle-income poor becomes very costly. The significant countries, 25% in lower-middle-income volatility in poor people’s incomes becomes countries and just 12% in low-income a risk to businesses. And poorly developed countries.12 Microcredit, despite its rapid financial services reduce demand, because growth, reached only 82 million households the poor cannot finance purchases without at the end of 2006.13 savings or credit—even if they could afford Insurance penetration rates are even those purchases over the long term. In Uganda, lower among the poor. Premiums as a share only 15% of households save in formal of gross domestic product exceed 9% in the institutions. In Zambia, fees are so high that United States but are less than 3% in the most people would have to accept a negative Philippines, Nigeria and China (figure 2.3). return on savings to save formally.14

CHAPTER 2. CONSTRAINTS STANDING IN THE WAY 37 1 See, for example, the joint UK Department for International Development–Asian Development Bank workshop on Making Markets Work Better for the Poor in Manila in 2005 (www.dfid.gov.uk/news/files/trade_news/adb-workshop.asp). 2 UNDP 2004. 3 UNFPA 2007. 4 UNDP 2008. 5 World Bank Report on Infrastructure. 6 Low-income countries have per capita gross national income of $905 or less in 2004; high-income countries have per capita gross national income of $11,116 or more (World Bank 2005). 7 Escribano and others 2005. 8 UNDP 2007. Refers to 1995–2005. 9 International Telecommunication Union’s World Telecommunications Indicators database. 10 Jenkins and others 2007. 11 Ruffing 2006. 12 UNDP 2004. 13 Associated Press 2006. 14 CGAP 2007.

38 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR PART II

FIVE STRATEGIES AT WORK Figure II.1. Growing Inclusive Markets STRATEGIES strategy matrix

Adapt Invest in Leverage Combine Engage products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government

Market information

Regulatory environment

Physical infrastructure CONSTRAINTS

Knowledge and skills

Access to financial services

40 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR As part I shows, ample opportunities exist Leveraging poor people’s strengths. for doing business with poor people in ways For example, hiring poor people as dis- that can empower them to improve their tributors or retailers in their communities, lives while generating business profits and co-developing products and services long-term growth. Capitalizing on those with them and building on their social opportunities, however, poses complex networks to develop informal contract challenges. Five broad constraints stand enforcement systems. in the way: limited market information, inef- Combining capabilities and resources fective regulatory environments, inadequate with other organizations. For example, infrastructure, missing knowledge and skills working with government extension and restricted access to financial services. agents to train farmers in quality Despite these constraints, many management; partnering with a non- inclusive business models are succeeding. governmental organization to raise Examples from the case studies include awareness of the need behind a product businesses that employ poor people in the or service offer; and building a coalition textile and tourism industries; businesses that of banks to establish a rating agency. source coffee, cotton, cashews, cocofibre Engaging in policy dialogue with nets and other crops and products from governments. For example, establishing poor producers; businesses that deliver basic a dialogue with policymakers to identify services—such as water, sanitation and and address particular constraints— health care—to poor people; and businesses whether by working individually or that provide services such as electricity, collectively with other companies for credit and telecommunications services, targeted advocacy, or by participating enhancing the productivity of the poor. in state-sponsored private sector The solutions that make these successes advisory committees. possible are as diverse as the environments in which they operate. Nevertheless, Other authors have already discussed analysing the solutions across cases reveals some of these strategies in this context. several patterns. The inclusive business In particular, avoiding constraints through models profiled here succeed, in the face of smart business models and engaging partner significant market constraints, by working organizations and poor people have been around or removing the constraints using repeatedly stressed.1 Relying on investments one or more of five broad strategies: in market conditions and engaging in policy dialogue, by contrast, are new contributions. Adapting products and processes. Table II.1 systematically links constraints in For example, using wireless technology the market environment to strategies that to avoid the constraint posed by the can yield effective solutions. absence of land lines. Any or all of the five strategies can be Investing in removing constraints. applied to each constraint—but the case For example, conducting market studies featured in this report suggest that research, training and informing today’s successful inclusive business models people and incorporating financing are applying each strategy more frequently into product or service offers. to some constraints than to others.

PART II. FIVE STRATEGIES AT WORK 41 Box II.1. Smart Communications: international remittances through Smart Communications is a leading wireless telephone services wireless phones in the Philippines provider in the Philippines. By changing ‘the old mindset that mobile phones were only for affluent people on the go’,1 the company saw a significant business opportunity in targeting the untapped potential of the low-income population, including the overseas Filipino worker community (the Philippines is the third largest recipient of remittances). Smart launched a number of flexible and affordable services adapted to the poor’s specific needs, including the sale of miniaturized prepaid airtime packages and the first international remittance system based on short message service (SMS) technology.

STRATEGIES

STRATEGY Invest in Combine Engage MATRIX: Adapt Leverage products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with SMART constraints with others government

Market information

Simplify Engage requirements collectively with Regulatory government environment Inadequate Lack of legal mobile banking documentation regulation

Enable wireless Engage micro- Build on existing top-ups entrepreneurs distribution Physical networks infrastructure Difficult Difficult Difficult transportation transportation transportation infrastructure infrastructure infrastructure CONSTRAINTS

Knowledge and skills

Simplify requirements, small Access unit pricing to financial services Lack of access to bank accounts, credit

Smart confronted three main challenges, which they overcame with successful strategies.

§ The first challenge was poor people’s inability to comply with the requirements needed to enter a mobile phone service contract: many of them had no official identity card and no bank account.

42 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Smart introduced the first prepaid wireless service in the country that did not require any documentation and the first mobile money transfer service that The Philippines: Smart introduced did not require the beneficiary to have a bank account. The very small wireless services that made banking denominations of the prepaid cards also did not require beneficiaries to easier for poor customers. Photo: Smart finance future expenses, so no access to credit was necessary.

§ The second challenge was how to sell and distribute airtime to millions of poor Filipinos across the Philippines, an archipelago of 7,100 islands where some places are hardly accessible by road. Smart began by building on existing distribution networks—small shops and other businesses. It also leveraged the strengths of the poor by offering micro-entrepreneurs the opportunity to resell airtime. In this way, Smart built a nationwide distribution network of more than 800,000 entrepreneurs who benefit from a 15% company commission. Finally, Smart adapted its sales process: instead of buying air time on prepaid cards, users could top up their cards using SMS technology.

§ The third challenge for Smart was to deal with the inadequate legislation on mobile banking, a service that had not existed before. Together with other operators and banks, Smart engaged in policy dialogue with the government to amend the mobile banking regulation.

Smart’s services have had a positive impact on the Filipino economy, as the convenience, affordability, security and timely service encourage more overseas Filipino workers to use formal channels to remit funds. And Smart’s focus on the low-income market has brought the company rapid growth: from 191,000 subscribers in 1999 to about 24.2 million in 2006, with 99% of the company’s revenue coming from prepaid cards.

1 Interview with Ramon Isberto, Public Affairs Group Head, PLDT and Smart, Makati, Philippines, November 2007.

PART II. FIVE STRATEGIES AT WORK 43 1. London and Hart 2004. In an exploratory study of 24 successful and unsuccesful business ventures to include the poor, London and Hart identified three strategies successful companies used that could all be summarized under the overarching capability of social embeddedness: collaborating with nontraditional partners, co-inventing custom solutions and building local capacity. Collaboration with nontraditional and local partners, and adapting products to local conditions and preferences, have been mentioned in many studies on strategies for doing business with the poor (for example, Prahalad 2004; Mair and Seelos 2006). Based on a detailed analysis of 50 cases, Wheeler and others (2005) have shown that self-reliant sustainable enterprises in developing countries often involve informal networks that include businesses, not-for-profit organizations, local communities and other actors.

44 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 3 ADAPT PRODUCTS AND PROCESSES

Kenya: M-PESA has developed a mobile phone money transfer service aimed at making financial transactions faster, cheaper and more secure. Photo: Vodafone

Tsinghua Tongfang (THTF) brought computing to farmers in China who had never used or even seen a computer. To accommodate their lack of computer literacy, the company created software that was intuitive to use (box 3.1). Through such innovations, THTF and many other companies have shown how inclusive business models can avoid constraints by adapting products or processes. While other innovation strategies entail filling market gaps or engaging other stakeholders, adapting products or processes can allow a business to circumvent constraints by acting on its own. So, this strategy is often used to deal with constraints that are very difficult to remove, an ineffective regulatory environment or inadequate physical infrastructure. Filling the gaps can be unfeasibly costly and time-consuming. Designing products and processes that get around them is sometimes the only option for an inclusive business model. Adaptations are rarely used to fill gaps in knowledge and skills. That is partly because communication and training are easier than adapting products or processes

45 Box 3.1. Case study – Tsinghua Tongfang: bridging a digital divide Not all innovations use new technology. Many product adaptations successfully reach the poor through what seem like steps down on the technological ladder. But their accessibility to the intended beneficiaries allows businesses to make leaps in growth and profitability.

Tsinghua Tongfang (THTF) is a high-tech Beijing computer company that identified a rich new market in a low-tech sector: China’s vast rural agriculture industry. China’s 900 million farmers have been slow to benefit from technological advances that have boosted agricultural output elsewhere. Farming depends on timely and accurate information as much as any other industry, if not more. But personal computers and the Internet are still largely absent from rural China and remain unfamiliar to its inhabitants. In 2003 THTF saw this situation as an opportunity to seize a large untapped rural market while helping to bridge the ‘digital divide’.

THTF conducted three rounds of market research and identified several challenges. In 2005 a basic computer cost the equivalent of three months’ income for a farmer—a prohibitive expense even before adding the monthly cost of Internet service (which was elusive, in any case, because of high startup costs for Internet providers). And farmers who could afford a personal computer usually did not know how to use one. Moreover, the quality of agricultural information available online was fairly low.

The solution for THTF was to tailor a product to farmers’ needs and resources. Prospective customers made it clear that the most appealing product would offer what THTF called a ‘systematic solution’:

and promise more immediate payoffs. them is important. The spread of mobile Another reason, however, is that certain basic telephony in developing countries, for example, skills can be indispensable for working with is technology-driven. Wireless networks free customers, employees or producers. data transmission from reliance on landline Two types of adaptation can be networks or transportation. But the wide- distinguished: technological adaptation and spread adoption of mobile phones itself was business process design. The two often go attributable in part to a change in business hand-in-hand, but distinguishing between processes—the move to selling air time on prepaid cards, which made it unnecessary for customers to have bank accounts and STRATEGIES freed providers from having to follow up on payments.1 Adapt Invest in Leverage Combine Engage products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government Business leaders can develop effective adaptations by observing and understanding target markets. Napoleon Nazareno, chief Market information executive officer of Smart Communications in the Philippines, recalls how the idea of

Regulatory prepaid cards in small denominations environment occurred to him: ‘One of our field salesmen asked what turned out to be the right

Physical question: Why can’t we sell phone credits infrastructure in very small amounts—like sachets for

CONSTRAINTS soap or shampoo? Our lowest price phone

Knowledge card at the time was 300 pesos—roughly and skills $6. Affordable, yes. But it was too high for many Filipinos.’ 2 Access to financial Smart took an existing innovation it services observed in the market, the sachet model, and translated it to its own business.

46 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR a versatile, durable, easily repairable platform, with value not just for agriculture but also for children’s education and for broader capacity building.

THTF needed a simplified, low-cost computer that could do many things and withstand the rigors of the rural environment. So it built one. Jun Li, vice-general Manager of THTF’s computer department, says: ‘[The] computer comes from the minds of … people in the agriculture industry. Putting our feet in the shoes of farmers is our basic principle. What we did is to turn their ideas into tangible computer products.’ Using the open-source Linux operating system, THTF fit its product to the new market by con- tracting local vendors to replicate more expensive, brand-name programmes. To help its product work well in a difficult environment, THTF embedded electricity cables with rat-repellent materials. It adapted a specialized package of programmes for rural users, including agriculture, distance education and vocational skills training.

THTF adapted its product in ways that cater to the poor, and its customers are now seeing the difference that information technology can make to their jobs and lives. Before the rural computing initiative can become wholly self-sustaining, it must mature and grow. Yet THTF’s innovation and skillful product adaptation showcase a strategy that can be used by other high-tech businesses looking to engineer a way into the markets of the poor.

The new model liberated Smart from a constraint—its poor customers’ lack of access to financial services—that had prevented many from paying even $6 for a phone card. Business models that free themselves from the most seemingly formidable constraints in their target markets can quickly increase in scale. From 2000 to 2005 the number of mobile phone subscribers in China: The cost of a developing countries grew more than five-fold, to almost 1.4 billion.3 basic computer equals three months of a farmer’s In the Philippines alone, mobile banking counted about 4 million income. Photo: UNDP users in 2006—and the industry was still in its early stages.4

LEVERAGING TECHNOLOGY

Business in poor people’s markets can benefit Leverage information and communica- from technological ‘leapfrogging’—skipping tions technology. Technologies used intermediate steps to rapidly bring an area to process and transmit information— with poor technology up to the state of the telephony, computers, the Internet and new art and thus to greater productivity. data processing tools—have been the key to Today, information and communications success for many inclusive business models. technology is supplying inclusive business In addition, the adaptations that allow models with strikingly successful product companies to do business with the poor and process adaptations. But other technologies sometimes lead them to an improved long- are also being used to address constraints term position in higher-income markets. in industries that meet basic needs, such as One successful information and com- utilities or health care. And technologies that munications technology adaptation is mobile reduce the use of resources offer ways to tie banking (m-banking), which allows millions the goal of human development to that of of people living far from any bank branch environmental sustainability. to access financial services—saving money,

CHAPTER 3. ADAPT PRODUCTS AND PROCESSES 47 Box 3.2. Mobile banking: branchless and wireless Mobile banking, or m-banking, offers financial services through mobile telephones or similar devices to millions of people who previously lacked access to banks. It allows customers to spend mobile telephone credits for such services as remittances, retail purchases and bill payments and use them as quasi-deposit accounts. With m-banking, people no longer need a bank branch or access to a wired network. Freed from these infrastructure constraints, m-banking is spreading across developing countries.

Celtel showed how m-banking can work in the difficult circumstances of postconflict insecurity. In the Democratic Republic of Congo, Celtel began offering m-banking shortly after the peace treaty was signed in 2003, when security was still poor and banking infrastructure debilitated. The service, called Celpay, uses encrypted short message service technology to allow its customers to wire funds across the country. An effective way to make payments in a war-torn country, Celpay proved so efficient that now the government is using it to pay its soldiers.

Users are finding their own ways to spread the benefits of m-banking further. Sente is the informal practice of sending and receiving money that leverages public phone kiosks and trusted networks in Uganda. Instead of sending money directly from phone to phone, someone with access to a phone can send airtime credit to a phone kiosk operator over the cellular network. Converting the airtime credit into cash, the kiosk operator gives the cash to a familiar person who lacks access to a phone or a bank account. In effect, the trusted kiosk operator and his or her phone take the place of an automated teller machine.1 The final recipient may save as much as the opportunity cost of a day’s labour plus travel costs to a mobile banking centre. And the system eliminates the need to carry cash— an invaluable boon in insecure areas. Sente is an example of how business and grassroots innovation can build on each another. Soon there may be responses from technology providers to make the practice more secure and convenient.

1. Chipchase 2006.

Innovative software and voice recognition Senegal: Pastoralists track cattle herds systems facilitate business with illiterate per- using cell phones and global positioning sons. In India, ICICI Bank and Citibank system devices. Photo: IDRC/Sy, Djibril developed biometric automated teller making machines with fingerprint identification payments, and voice-enabled navigation, reaching managing loans and receiving remittances, users who lacked access to banking systems. all without entering a bank (box 3.2). And in South Africa and elsewhere, simple More generally, mobile telephony recognition systems based on smart cards are provides the infrastructure for delivering facilitating payment processes for vendors other data-based services. The data highway and consumers (box 3.3). can often replace poor roads and missing The examples discussed in this section logistics networks. For example, telemedicine show information and communications is giving people in remote areas better access technology being used to address four of the to quality health care: in rural India, Narayana five constraints in the Growing Inclusive Hrudalayanaya has established ‘telehealth’ Markets strategy matrix: centres linked to centralized facilities by satellite, allowing doctors to help patients Biometrics allow businesses to at a distance. avoid problems with security, legal

48 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR documentation and contract enforcement Water purification systems allow water in challenging regulatory environments. that is locally available but unsafe to be made usable for drinking and cooking. Wireless networks take the place of Thus, no pipelines are needed for missing physical infrastructure and logistics networks. delivery. Across developing countries— from Haiti to Viet Nam to Pakistan— User-friendly software bridges gaps in and in collaboration with nonprofit customers’ knowledge and skills. organizations, Procter & Gamble is M-banking and smart cards make up for selling sachets of a point-of-use purifi- restricted access to financial services. cation powder called PUR. Nonprofit organizations buy sachets for $0.04 per In addition, information and communications unit (the cost of production) and sell technology can be used to gather market them for $0.05 to local entrepreneurs, information—for example, through electronic who, in turn, sell them to villagers for surveys. The applications in use today will less than $0.10. By the end of 2006 surely be followed by many more technologies Procter & Gamble had sold 57 million that will enable future inclusive business models. sachets and provided 260 million litres of safe, clean water worldwide. The Apply sector-specific solutions. company is now selling the product in Do other technologies exist with as much the United States for $2.50 per unit. enabling potential as information and communications technology? Though Sanitation technologies can treat sewage nothing rivals information and communica- on site. In India, Sulabh uses a water tions technology’s ability to address a broad toilet that dries sewage rather than variety of challenges, several other types of removes it. Two pits are installed, and technology are enabling inclusive business each is used in models in particular sectors, for example: turn while the New energy technologies overcome Box 3.3. Smart cards: the limitations of grid-based utility high-tech payments allow services. In many areas, the cost of Amanz’abantu to bring building a grid has deprived the poor To enforce water to South Africa’s poor of access to electricity. Off-grid energy South Africa’s solutions generate energy at the site constitutional of use, for households or for whole recognition of communities, without large invest- water as a human right, the country’s government ments in interurban infrastructure. contracted Amanz’abantu to supply water to rural Renewable resources—such as sunlight, and peri-urban populations. Before the company’s wind, water or biomass—can be used. arrival, villagers—mainly rural women—would walk up to several hours to fetch water from rivers In Southern Mali, Électricité de or other sources. Now, they are issued smart cards France collaborated with local and with microprocessors that hold data and give international partners to establish two them access to clean water from shared taps. They rural energy services companies that load money onto the cards using card readers in produce energy through photovoltaic village shops. facilities and diesel generators for Amanz’abantu’s smart card system lets the gov- 24 villages and 40,000 people. Access ernment ensure free, equitable access to 25 litres to energy, in turn, allows for more of water a day for each person, and access to extra efficient production methods and water at a low cost. (In Uganda, the Association of the ability to use other products and Private Water Operators achieved the same result services, preparing the ground for with a less technologically advanced solution: more inclusive business models. coin-operated shared taps.)

CHAPTER 3. ADAPT PRODUCTS AND PROCESSES 49 other dries. Water that seeps out business in a more environmentally through the pit walls is naturally filtered sustainable way. For example, renewable and does not pollute ground water. Solid energy sources provide new electricity waste dries to form lumps, which users without putting new stresses on the can then remove. Again, there is no world’s climate. need for a grid-based sewage system. Brazilian food processing company Medical technology and biotechnology Sadia has built environmental sustainability offer new ways to overcome infrastructure into its revenue design. Its Programme for and logistics constraints. The 1980s saw Sustainable Swine Production provides more a major breakthrough in the adaptation than 3,500 swine producers with biodigesters, of vaccines for killer communicable which use bacteria to ferment swine waste diseases—measles, rubella, whooping in closed reservoirs. By converting the cough, diphtheria, tetanus, tuberculosis— resultant methane gas to carbon dioxide, to developing country conditions. Older the biodigesters reduce greenhouse gas vaccines had required transportation along emissions. Under the Kyoto Protocol Clean an uninterrupted cold chain to the point Development Mechanism, such sequestration of use. The newly developed, freeze- of greenhouse gases earns carbon credits dried vaccines are more heat-stable. that can be traded with other companies. Together with other adaptations, such Selling the credits is estimated to cover as single-shot vaccine cocktails, these the cost of the biodigesters. In addition, innovations boosted vaccination rates.5 gases produced in the process can be used as energy—reducing operating costs for Achieve environmental sustainability. the producers. And a by-product from the Technology helps companies do business in fermentation process can be used as crop difficult conditions. It also helps them do fertilizer or as food for fish breeding.

DESIGN BUSINESS PROCESSES

Although technology promises to create new Without access to savings, credit or insurance, ways to deal with daunting challenges and the poor have limited options for managing facilitate scalable business models, it is not their financial resources. Many poor workers a silver bullet. Similar effects can often be receive their income by the day and buy only achieved through business process design what they need for each day. Farmers realize that leverages existing resources and capabilities their income after harvests, which depend on to get around constraints. crop cycles and may occur just once a year. Inclusive business models need payment Adjust to the cash flows of the poor. procedures that reflect such cash flow patterns. Smart payment and pricing procedures allow To make product offers match the inclusive business models to reflect the cash purchasing behaviour of poor consumers, flows of their customers and suppliers, which one solution that has been applied across the are constrained by low and unreliable board—from soap to cell phones—is small- incomes and a lack of access to financial unit pricing.6 All kinds of consumer goods services. Low and unreliable incomes do not from shampoo to spices are now sold in mean that people cannot afford to consume tiny packages or ‘sachets’. Apart from the or invest—only that they cannot afford large example of mobile telephony, the model has expenditures for future consumption. been used for providing water (with smart

50 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR India: Sulabh’s coin-operated toilet facilities provide low-cost sanitation to poor consumers. Photo: Sulabh

card–operated or coin-operated shared taps) facilitate payment for farmers who receive and sanitation (Sulabh’s coin-operated income annually. toilets). Since such business models work Credit arrangements should also match through prepayment, they free providers expected cash flows. Low-income producers from the risk of nonpayment for services. find it difficult to make production investments For bulky purchases that cannot be that will pay for themselves only over the easily divided into sachet-sized packages, longer term. Rather than make large outlays solutions resembling leasing and installment with insecure payoffs, producers prefer to payments are being developed. Mexico’s invest in shorter-term options—even if they cement producer CEMEX offers a payment are less profitable. Inclusive business models system, Patrimonio Hoy, that allows low-income have met this challenge by matching credit families to purchase houses in installments— service methods to cash flows. In Ghana, giving them incremental access to services, the Integrated Tamale Fruit Company offers cement and other building materials through mango outgrowers loans for their initial a group savings programme. And in Brazil, investments. The loans are not due until Microsoft offers a microleasing scheme, three to six years after planting, when the FlexGo, for computers that run its Windows trees bear fruit. In Brazil, Votorantim Celulose operating system.7 Consumers pay a portion e Papel (VCP) acts as a form of guarantor of the upfront cost to bring home a computer. for loans to its outgrowers of eucalyptus, They pay the balance by purchasing prepaid a crop that takes seven years to grow to cards from local vendors that activate the harvest. The loans are provided by ABN computer for a limited time, putting it in a Amro without collateral. VCP guarantees limited-access state when time runs out. that it will buy the harvest for least at the When the computer is fully paid for the price of the loan plus interest. metering technology is deactivated. Flexible payment gives consumers the Simplify requirements. The lack of option to pay at different times. In Électricité knowledge and skills is another pervasive de France’s rural electrification scheme in constraint facing inclusive business models. Mali, customers could pay a fixed price for A common solution is ‘de-skilling’—simpli- their electricity supply on either a monthly fying processes or making products easier or a yearly basis. The yearly option can to use. One example is the microfinance

CHAPTER 3. ADAPT PRODUCTS AND PROCESSES 51 company Edu-Loan, a provider of post- Traditional crop insurance, in which insurers secondary education loans, which empha- pay out claims based on loss evaluations, has sized accessibility and made all documents failed in many countries mainly because of easy for its South African clients to under- the high cost of monitoring and farm-level stand by clearly explaining the loan process. inspections. Such inspections are needed Another is the Chinese computer firm because the traditional system gives claimants Tsinghua Tongfang (see box 3.1), which an incentive to over-report or invent crop adapted its software to the skills of farmers— losses. The index insurance offered by for example, by preinstalling agriculture BASIX circumvents these adverse incentives programmes to spare users the complexities by basing payouts on widely available of installing them. information about rainfall.10 The index Businesses can address the lack of title insurance entails significantly less under- among the poor by simplifying documentation writing and administration. requirements.9 Long-term service relationships— in utilities, banking or telecommunications, Make operations more flexible. ‘Smart for example—have typically required much tweaks’ can enable inclusive business models documentation. But poor people often even in the most apparently discouraging cannot even document their own identity, circumstances, including conditions of much less their employment or their owner- lasting political instability and insecurity. In ship of a house. Unlike traditional credit Guinea, an association of cashew producers institutions, microcredit providers such as sought to prevent the business failures that Mibanco in Peru do not require documentation neighbouring countries, such as Côte to guarantee loans. Potential clients need d’Ivoire, had suffered from a combination only have official identification, prove of political instability and capital-intensive a permanent address and show a significant units. Using efficient, inexpensive technology, cash flow. Onsite business advisers assess the cashew association established small- their reliability and ultimately approve the scale processing units close to the villages loan. So far, the model has provided credit to of producers. That move avoided the initial more than 300,000 clients, representing a cost of investing in a large central processing portfolio that exceeds $1.63 billion. facility, and it made production processes more independent from the effects of Avoid adverse incentives. Some micro- political turmoil (such as road blockages). finance models do entirely without docu- In addition, it made disinvestment easier mentation or collateral, relying instead on in a worst-case scenario. incentives created through group lending, as does Forus Bank in Russia, for instance. Provide to groups. Communities often Defaulting borrowers do not merely lose the access resources through joint investments, opportunity to borrow more for themselves; especially for such large expenses as durable they also prevent other members of their goods and infrastructure-based services. groups from obtaining future loans. Since From tractors and water taps to telephone failure to repay carries the cost of shame and television networks, shared use can and social exclusion, the incentive to repay spread costs and make purchases more is high. Currently payback rates for group affordable. And providing infrastructure loans at the Grameen Bank exceed 98%.9 to a group saves individual household (Chapter 5 discusses other ways businesses connection costs. can apply community engagement as a ‘tweak’ to avoid constraints.) Shared access can be organized in two ways: The weather index insurance offered in India by MFI BASIX is another example One community member makes the of adaptation to deal with adverse incentives. purchase and charges others a fee for

52 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure 3.1. Summary: Approaches to adapting products and processes

Constraints Strategy 1 Invest in Leverage Combine Engage removing the strengths resources and in policy Adapt products market of the poor capabilities dialogue with and processes constraints with others government

Market § Avoid adverse incentives (index information insurance avoids reporting requirements)

Regulatory § Leverage ICT (recognition systems avoid the environment need for legal documentation and avoid fraud) § Simplify requirements (reduce need for legal documentation) § Avoid adverse incentives (group enforcement replaces formal enforcement systems) § Make operations more flexible (small production units reduce risk of insecurity)

Physical § Leverage ICT (wireless communication infrastructure replaces physical transportation and facilities, for example, m-banking, telemedicine) § Apply sector-specific technology solutions (off-grid energy production, water purification systems, on-site sewage treatment) § Provide to groups (save on connection infrastructure and reduce individual cost)

Knowledge § Leverage ICT (design smart user and skills interfaces to simplify interaction) § Simplify requirements (adjust processes to skill levels of users)

Access to § Leverage ICT (m-banking) financial § Adjust to cash flow of the poor (small products and unit pricing, instalments, flexible payment, services cash-flow adjusted credit)

access. In this widely used model, the transparent and efficient method for entrepreneur is the company’s only client. accounting and billing. Technical The ‘Mamans GSM’ in the Democratic solutions were developed by Uganda’s Republic of Congo are a good example, Association of Private Water Operators, purchasing mobile telephones and with its coin-operated water kiosks in airtime and renting them to others. In small towns, and India’s Sulabh, with South Africa, SharedPhone developed a its pay toilets in public areas. In the SIM application that lets the reseller set Philippines, Manila Water combines a technical adaptation with community a minimum charge and limit call length engagement, making user groups (which the system accurately displays).11 responsible for payments while providing Users are billed individually for what them with information about individual they consume. This model requires a use through submetres.

CHAPTER 3. ADAPT PRODUCTS AND PROCESSES 53 India’s e-Choupals, or Internet kiosks, are Not surprising, the creative solutions a model for providing shared resources to featured in this chapter have received the producers. To make weighing and paying for most attention from the business community soybeans more efficient, Indian agriproducts in the search for business models that include company ITC Limited installed the kiosks in the poor. However, adaptation is not the only suppliers’ villages. A kiosk serves an average of strategy for dealing with difficult market 600 farmers in 10 villages within a radius of environments. Indeed, it is not even the most about five kilometres. By eliminating the need common strategy among the 50 case studies to carry beans to a market and the middlemen, that inform this report. At least as important the kiosks improve the farmers’ bargaining to inclusive business models are the other power while allowing ITC to source soybeans four strategies: investing in removing at more favourable prices—so much so that constraints, leveraging the strengths of the it is profitable for ITC to provide them for poor, combining resources and capabilities free. ITC intends to reach 100,000 villages with others and engaging in policy dialogue with the network in the next decade.12 with governments (figure 3.1).

1 An example: “The introduction of prepaid services has been one of the main contributing factors for the explosive expansion of the mobile sector in [least developed countries], where more than half of the population lives on less than one dollar a day. Prepaid cards allow subscribers more control over their mobile telephone expenditure, releasing operators from performing time- consuming credit checks that are essential under the subscription option” (ITU 2006). 2 Quoted in Ganchero 2007. 3 Hammond and others 2007, p. 22. 4 Porteous and Wishart 2006. 5 UNDP 2001, p. 27. 6 Small unit pricing does not necessarily make the product cheaper. On the contrary, it often leads to a price increase when comparing the price-quantity relationship of small unit and larger unit products. But this pricing model increases affordability by adjusting the required expense of the purchase to the buyer’s cash flow. 7 For more information on Microsoft’s FlexGo prepaid scheme, see www.microsoft.com/presspass/press/2006/may06/05-21EmergingMarketConsumersPR.mspx. 8 Subject to central bank requirements regarding know your customer, anti-money laundering, combating financial terrorism regulations. 9 Grameen Bank website (www.grameeninfo.org/bank/atagrlance/GBGlance.htm). 10 However, where such infrastructure as reliable weather stations are not in place, this information may not be available. Index insurance has its own issues, such as with respect to the reliability of the information. Damage due to weather may vary greatly due to topographical differences, which are not reported in the weather data. 11 SharedPhone website (www.sharedphone.co.za). 12 Annamalai and Rao 2003, pp. 1–2 (www.echoupal.com).

54 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 4 INVEST IN REMOVING MARKET CONSTRAINTS

Mauritania: In a desert environment, Tiviski invested in infrastructure and training by building entire dairy facilities and developing programmes for herders. Photo: Tiviski

Nancy Abeiderrahmane made unusual investments in her Mauritanian business environment. Every dairy business needs a cold chain and storage facilities. But not every dairy business needs to offer skills training or insurance to its suppliers. By training the herders in management and effectively establishing an insurance system against production volatility and livestock loss, Nancy removed constraints on knowledge and skills, infrastructure and access to finance in her market—providing conditions that her business needed to succeed, and that companies in developed markets usually take for granted (box 4.1). As chapter 2 discusses, the markets of the poor are characterized by five broad constraints that deter business entry and hinder growth: limited market information, ineffective regulatory environments, inadequate infrastructure, missing local knowledge and skills and restricted access to financial products and services among potential suppliers and customers. To succeed, many inclusive business models must invest to remove these constraints.

55 Box 4.1. Case study – Tiviski: money well spent Most of the three million people who live in arid Mauritania are nomadic herders. The idea of launching a dairy business there took shape when local entrepreneur Nancy Abeiderrahmane visited a small milk production facility in Europe. She immediately saw the business potential for processing milk in Nouakchott, Mauritania, a city where camel milk was sold door-to-door in primitive and unsanitary conditions. She described her opportunity to build Africa’s first camel milk dairy, an opportunity that no one had pursued: ‘NGOs [nongovernmental organizations] won’t do it [dairy business], governments won’t do it, you do have to have somebody who somehow believes that it’s going to make a profit.’

Nancy faced significant challenges. Selling milk requires a large market and economies of scale in collection, processing and packaging. Mauritania’s milk sources were widely dispersed, its dairy industry unregulated and infrastructure for storing or processing milk nonexistent. Herders and milk producers were scattered and lacked formal veterinary support or other animal husbandry support services. And in the desert environment, land transportation facilities were scarce.

Nancy addressed these challenges by filling gaps in Mauritania’s infrastructure and by engaging the poor. Her plan for collecting and selling camel milk found a backer, La Caisse Centrale de Coopération Economique (now known as Agence Française de Développement), which loaned her one million French francs to get started. That initial investment allowed Nancy to build collection, processing and storage facilities, enabling Tiviski Dairy to operate across a diverse field of supply while getting its

Many inclusive business models invest make or enforce regulation. They could only in the knowledge and skills of their target enforce existing regulations within an organ- customers, producers, employees or micro- ization, or make rules to bind themselves. entrepreneurs through training, marketing Investing to remove constraints in poor and education. As the matrix shows, investing people’s markets can create both private and is used least frequently to make regulatory social value. On the private side, investment environments more effective, since businesses can increase firm-level quality and productivity have neither the mandate nor the ability to and stimulate market demand. It can drive development of new capabilities, enhance corporate reputation and improve the com- STRATEGIES petitive context for business.1 On the public

Adapt Invest in Leverage Combine Engage side, removing market constraints creates products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government benefits that are shared outside the business. For example, a firm that provides education and training for its employees helps create a Market information more highly skilled workforce, a resource that is shared as its employees move on

Regulatory to other jobs and business opportunities. environment Similarly, a firm that gathers and analyses market information might begin as the sole

Physical beneficiary of its efforts. But as it begins to infrastructure succeed, others will learn from and imitate

CONSTRAINTS its approach, increasing choice and driving

Knowledge and skills down prices—benefiting even more low- income consumers. From a traditional business planning Access to financial services perspective, the question is whether investing to remove constraints in the existing market can create enough private value to be cost-

56 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR milk to market safely. Tiviski also invested in support programmes for the herders—the company’s lifeblood— providing them with training, veterinary care and fairly priced animal feed. Through loans from Proparco, the International Finance Corporation and a local bank, as well as through the company’s own cash flow, Tiviski was soon able to invest the 4 million needed to build an ultra-high temperature processing plant. The company now exports camel cheese to New York City.

Nancy’s willingness to risk a large initial investment brought rewards to her and to many other Mauritanians. Tiviski is profitable. It directly employs 200 people and indirectly supports 1,000 families. Animal herding is becoming more accepted as a chosen occupation. Safer, more widely available camel milk is making many people healthier. A traditional way of life is being preserved. And the business is environmentally sustainable. ‘Our experience is very simple, very reproducible’, Nancy says. In addition, ‘you do have the satisfaction that you are making a big difference for a lot of people.’

Mauritania: Tiviski provides herders with training, veterinary care and fairly priced animal feed. Photo: Tiviski

effective. But within the perspective of inclusive business models, a second question arises: Can the investment’s social value proposition be leveraged to access alternative sources of funding, reducing capital costs for the firm? This chapter addresses both questions in turn.

ENSURE PRIVATE VALUE

Removing constraints in poor people’s markets effective by creating or being made to create is cost-effective when it creates private value intangible, or longer term, private value. that is tangible (through increased productivity, quality or market demand) and capturable Conduct market research. Amassing (ensuring sufficient benefits to the company). market information creates tangible value. But removing constraints can also be cost- Construmex, a venture of the Mexican

CHAPTER 4. INVEST IN REMOVING MARKET CONSTRAINTS 57 Morocco: Lydec is providing Casablanca with The value of an investment in market appropriate infra- information is not only tangible but fairly structure. Photo: Lydec capturable, since a company can keep the information proprietary—at least initially. Later, when the company has succeeded, others can observe and benefit by replicating its initiatives.

Build infrastructure. Businesses that depend on delivery infrastructure may have to invest in filling infrastructure gaps. Such investments are less common for roads than for infrastructure that is usually construction giant CEMEX, was conceived proprietary, such as pipelines, landlines or as an ‘in-kind remittance’ product, enabling electricity grids. Mexican migrants living in the United After Manila Water won the concession States to purchase home building materials to serve the east zone of metropolitain for relatives in Mexico. Despite CEMEX’s Manila, the company had to invest heavily to knowledge of low-income consumers in improve and expand pipeline infrastructure. Mexico, it initially knew little about the By 2005, it had added almost 1,300 kilometres migrants who were the target market for of pipelines and invested the equivalent Construmex. Construmex partnered with of more $340 million. These investments Mexican consulates in major US cities to do have paid off: its customer base has doubled, market research, including surveys, interviews nonrevenue water use has fallen, service is and focus groups. In exchange, it provided consistently available and water quality the consulates with material donations to is excellent. restore and improve consulate facilities. The investment paid off: since 2001 Improve supplier performance. Construmex has served more than 14,000 Building employee and supplier knowledge, Mexican immigrants and generated $12.2 skills and access to finance creates tangible million in sales of construction materials, with and capturable private value. By increasing a view to break even in the years to come. productivity, quality and reliability, their value to the business increases. Many inclusive business models in the Growing Inclusive Markets database reflect such investments by firms. Guyana’s Denmor, a clothing manufacturer, spends over $250,000 a year training low-income employees in basic literacy and life skills. The employees must learn to write their

Guyana: Low-income employees of Denmor are given paid time to attend company-provided training sessions, where they learn basic skills needed, for example, to count garments and read labels. Photo: Inter-American Development Bank

58 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR names, count and read labels and garment with their employees or suppliers through specifications. They are given paid time to programme fees. Such fees may be nominal and participate in sessions with invited represen- largely symbolic, intended chiefly to enhance tatives from the Ministry of Social Services participants’ commitment to the programme. and other agencies, such as the Pan American Or they may be financially significant, directly Health Organization. The result: Denmor’s recouping some programme costs. Other workforce is highly motivated, and retention businesses recoup them indirectly through rates and productivity are high. increased quality or productivity, perhaps In Ghana, Barclays Bank has engaged using contracts to ensure that they reap traditional money collectors, known as Susu the benefits. It is fairly common to offer collectors, to offer a wider, safer range of savings employees education and training programmes and loan products to low-income citizens. if they will commit to work for the company Barclays offers the Susu collectors in its for a specified amount of time. Contracts network training in delinquency manage- with suppliers are often designed to help ment, financial credit and risk management. capture as much value as possible from any Barclays also offers its end users education on assistance a company gives them. To reap financial management and insurance. In the the benefits of the interest-free loans it long run, this education will benefit Barclays, provides to farmers in its outgrower network, because more end users will appreciate the Ghana’s Integrated Tamale Fruit Company value of savings and channel theirs to the requires farmers to sell all their mangoes bank through the Susu collectors. through the company until their loans When investing to remove knowledge are repaid (box 4.2). and skills constraints, some businesses share the cost

Box 4.2. The Integrated Tamale Fruit Company: investing to remove market constraints and ensure quality crops The Integrated Tamale Fruit Company, an exporter based in Ghana, has made substantial investments to remove constraints in its suppliers’ knowledge, skills and access to finance.

The company loans farm inputs—cutlasses, seedlings, fertilizer, water tanks and water service and technical assistance—to mango farmers in its outgrower network, who would otherwise need to invest about $7,000 over five years before seeing real returns from their crops. The cost of the loaned inputs is repaid, without interest, starting in the fifth year. About 30% of sales go towards repayment.

The company also provides education to the outgrowers, whose ability to repay the loans depends on their ability to produce good crops. Since illiteracy makes it difficult for the farmers to meet international standards, the company began training the farmers in best practices.

Another skill important to the success of the outgrower scheme was the farmers’ capacity for self- representation. The company organized farmers into an Organic Mango Outgrowers Association, which acts as an intermediary between the farmers and the company, serving as the farmers’ voice and advocate and allowing a more efficient dialogue with the company. A transition is planned to a financing structure based on membership fees.

CHAPTER 4. INVEST IN REMOVING MARKET CONSTRAINTS 59 Raise awareness and train consumers. in industries with longer-term relationships Investing in consumer knowledge and skills between businesses and their clients. In such can also create highly tangible, capturable industries, a firm can restrict access to knowl- value for a company, depending on the com- edge- and skill-building services to its own pany-consumer relationship and the presence customers. For example, a financial services of competitors. This is a common strategy company might provide financial literacy for stimulating market demand among the programmes to its consumer credit clients or inclusive business models in the Growing basic accounting and even business manage- Inclusive Markets database. Sometimes ment skills to its small business borrowers. the investments are simply marketing intended Kenya’s K-REP Bank trains its loan to generate brand awareness; other times clients in financial literacy, business skills and they help customers understand a basic responsible use of credit. While increasing value proposition. To stimulate demand for the value of the loan to the client, training its toilet facilities in India’s low-income also increases the likelihood of repayment. communities, Sulabh conducted sanitation Similarly, Barclays offers training not only and hygiene awareness campaigns. About to the Susu collectors through which it 10 million people have used the facilities; provides microfinance services, but also to Sulabh’s revenues in 2005 were $32 million, the collectors’ end clients. Other industries, with a 15% profit margin. Similarly, Unilever too, can use consumer education and training raised awareness about the health benefits to help low-income consumers use products of handwashing to stimulate demand for its and services more effectively. Patrimonio Lifebuoy soap. Some 70 million people in Hoy, a programme from Mexican cement rural India have benefited from Unilever’s giant CEMEX, supplies home design and Health Education Program—the single construction assistance along with the largest private hygiene education programme building materials that it sells to low-income in the world—and today Lifebuoy leads in consumers in Mexico. By ensuring that the 2 every Asian market where it operates. results of the programme are safe, durable Consumer education can enhance a and attractive, CEMEX prevents liability, company’s reputation by establishing trust enhances its brand image and fuels in a brand. And in a market with few or no word-of-mouth advertising. competitors it can help solidify the company’s first-mover advantage. However, the more Build financial products or services. competitors present in a market, the less likely In some industries, removing constraints that a business will be able to reap all the to consumer access to financial services can benefits of its investments in consumer create tangible, capturable value for inclusive education. That drawback can be countered business models by enabling poor consumers to patronise them. Offering consumer credit is especially useful for expanding a customer base if competitors do not offer such loans. Examples include Casas Bahia in Brazil, CEMEX’s Patrimonio Hoy microloan system for home builders and Mexican retail giant Elektra’s Banco Azteca (which Wal-Mart is now replicating in Mexico). In Indonesia, taxi drivers are not considered creditworthy, making it nearly impossible for them to get credit to start a taxi business. As a result, taxi company Rajawali designed a taxicab Madagascar: Women attend financial management training. Photo: Adam Rogers/UNCDF ownership scheme, under which the company guarantees individual loans to

60 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR taxi drivers from a local leasing company, repaid daily over five years. With a default rate of zero and increased accountability from the drivers, the company benefits and the 2,257 participating drivers earn an increased net income, along with a deep sense of security and opportunity.3

Capture the intangible benefits. Besides creating tangible value, removing constraints in knowledge, skills, infrastructure and access to financial products and services can create intangible or longer-term value— for example, brand image, employee morale, corporate reputation and the potential to develop new capabilities and strengthen the competitive context for business. Capturing this value increases the cost-effectiveness of investing in removing market constraints. The Indian firm Tata Sons Limited has invested heavily in market conditions in the cities where it operates for all these intangible and longer- term reasons, providing road maintenance, water and electricity, street lighting, health care, sanitation, education and more. Jamshed Nicaragua Photo: Inter-American Irani, director of Tata, argues: ‘[India is] far Development Bank away from reaching that phase of economic launched by government and private development where government is solely organizations. For the near future, the responsible for the basic needs of the public. company is targeting cities including We don’t have a social security, adequate Bengaluru, Delhi, Kolkata and Mumbai.5 health and education services. So till then, Another example comes from South corporate houses should fill the gaps.’4 Africa’s mining industry. The post-apartheid By providing such services, Tata also government realized that the country’s acquires experience that will enable it to prospects for political stability and economic engage in new core business activities. An growth depended on giving economic example is the Jamshedpur Utilities & Services opportunities to historically disadvantaged Company, a wholly owned subsidiary of groups, primarily blacks. An aggressive Black Tata Steel, preparing to exploit commercial Economic Empowerment agenda required opportunities in untapped municipal services companies to meet targets for ownership, business, especially water and sanitation. employment and procurement by blacks to As Managing Director Sanjiv Paul explains: qualify for government contracts. A mining ‘If India has to move forward, these services, company, Anglo American, increased its Black some day or the other, will have to be Economic Empowerment procurement by privatized in the rest of the country also, building the knowledge and skills of small and we will then be in a position to broad- Black Economic Empowerment businesses base our services.’ Haldia Development and improving their access to finance. Authority has awarded Jamshedpur a The company set up an internal venture contract to provide water infrastructure, and fund, Anglo Zimele, to offer these services the company has partnered with Veolia on a commercial basis. The fund is now Water India to jointly bid for projects highly profitable.6

CHAPTER 4. INVEST IN REMOVING MARKET CONSTRAINTS 61 Poland: Almost a third of the start-up funding for a rural telephone cooperative came from local governments.

LEVERAGE SOCIAL VALUE

As discussed above, investing to remove and nonprofit social investment funds, as market information, knowledge, skills, infra- well as governments. They enable the private structure and access to financing constraints sector to create social value by sharing costs creates public and private value. Denmor and in two ways: through grants and through the Integrated Tamale Fruit Company are reduced-cost and ‘patient’ capital. not only increasing their employees’ and suppliers’ effectiveness on the job, but they Use grants, subsidies and donations. are also developing human capital that will Grants, subsidies and donations are alloca- open other economic doors for them. Sulabh tions of capital that are not expected to be and Unilever are not only drumming up repaid. Grants can be available externally demand for their toilets and soap, but they and, in large firms at least, internally through are also raising awareness about key public corporate social responsibility and philanthropy health issues, reducing the incidence of departments. Common external sources of disease. Construmex is demonstrating a grants are national, state and local govern- business model that other firms—in the ments and bilateral donors such as Agence construction materials sector and beyond— Française de Développement and the US can emulate, providing even more options Agency for International Development. for migrants who want to help their Multilateral donors such as the World Bank families in their home countries. sometimes offer grants. The social value these investments Government grants and subsidies are create opens doors for cost-sharing with common in many business contexts, covering socially minded funding sources. That can basic research and development to export be extremely important in building the promotion. Now they are being offered to confidence of entrepreneurs and larger firms businesses investing to remove constraints in to invest, and in making an investment poor people’s markets—and for other aspects potentially cost-effective for those who of inclusive business model development, doubt they can extract enough private such as feasibility studies, pilots and training value from it otherwise. programmes. Some aim to create incentives Socially minded funding sources include for one-time investments in shared resources, international donors, individual philanthropists such as roads or electrical grids. Others aim

62 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR to promote business models that will make significant impact products, costs for capacity people’s lives better on an ongoing basis, building, costs for building customer capacity increasing their income, improving their and costs of building capital access.’ 8 health and so on. Some aim to do both. To the list of costs that are smart to Both types of grants are investments in subsidize, Harvard economist Dani Rodrik social value creation. adds training costs for technical, vocational In Mozambique, the governor of Cabo and language skills.9 In South Africa’s Rand Delgado province provided state funding to Merchant Bank 20% of a grant from Agence two nongovernmental organizations to form Française de Développement supported a for-profit subsidiary called VidaGas, which education of home loan candidates about provides poor households in rural, urban and their prospective rights and duties as peri-urban areas with liquefied petroleum homeowners. Such education helps poor gas as a substitute for kerosene, an efficient, clients get the most out of investments, clean and cost-efficient alternative that makes on-time repayment more likely and— promotes improved health conditions. In when home purchases are successful—can Poland local governments in rural areas encourage more clients to buy homes. contributed 30% of the startup funding for Rodrik cautions that direct transaction DTC Tyczyn, a rural telephone cooperative, subsidies are not always smart—they can with the remainder of the investment easily ‘[invade] the heart of market processes coming from the sale of shares, connection [and] run the risk of distorting prices and charges for subscribers and bank loans incentives’—but he affirms that with careful at preferential rates. attention to design such subsidies can An example of bilateral donor funding create welcome for inclusive business models is the public- demonstration private partnership programme of effects.10 An Box 4.3. Offering grants Gesellschaft für Technische Zusammenarbeit, example of such the German government’s development for inclusive business model development: the challenge agency. The programme funds investments funds of the UK Department that go beyond core business activities, for International Development including investments to remove constraints The challenge in poor people’s markets. Success stories funds of the include a startup to provide medical UK Department equipment to Tanzania’s public hospitals, for International Development, including the Business capacity building to help Ghanaian tomato Linkage Challenge Fund and the Financial Deepening farmers do business with Unilever and Challenge Fund, offer grants for preparatory phases research and training in Viet Nam to and for investments, including investments to remove constraints in poor people’s markets. promote sustainable cocoa farming in Mars’ Successes include: value chain. Another organization that offers such grants is the UK Department § Vodafone’s M-PESA mobile transactions for International Development (box 4.3). service in Kenya, which is signing up more than 1 As DFID and the United Nations Capital 6,000 people a day. Development Fund (UNCDF) mention, § Standard Chartered’s agricultural credit best practice in grant funding is generally card in Pakistan, which enables farmers to obtain considered to ‘serve the purpose of institu- seeds and other inputs at the beginning of the tional and market development without season and pay for them at harvest. unduly distorting the market or lowering § TATA-AIG’s network of microinsurance the incentives for strong institutional agents in India, which during its first three years performance.’ 7 According to the Development sold more than 34,000 policies.2 Finance Forum, ‘costs that are “smart” to subsidize are, for example, startup costs, 1. Business Week 2007. 2. Roth and Athreye 2005. research and development, costs of high-risk/

CHAPTER 4. INVEST IN REMOVING MARKET CONSTRAINTS 63 careful design: a subsidy, supported by inter- virtues of cement-based materials in national donor money, from the Malian Agency housing construction. for the Development of Household Energy People who oversee company budgets and Rural Electrification to expand the for philanthropy, public affairs and corporate Rural Energy Services Companies that will social responsibility can often help develop pay for up to 70% of the expansion, allowing inclusive business models. Indeed, some are the companies to roughly halve tariffs and expressly charged with investing to remove increase Malians’ access to energy. If the market constraints. For example, poor public companies’ profit margins exceed 20%, the health lowers productivity and increases subsidy will be reduced. employee turnover costs. Companies such Bilateral and multilateral donors can as mining firms Lonmin11 and Anglo have complex application and social impact American12 that operate in Sub-Saharan reporting requirements. Entrepreneurs and Africa, where HIV/AIDS is prevalent, have companies seeking donors’ help must evaluate built robust corporate social responsibility the transaction costs of these requirements. programmes to provide counselling, testing But donor funding often carries perks such as and treatment for their employees. technical assistance, contacts and credibility. Tax relief is also a key enabler for Both small and large companies have taken businesses. The South African government’s advantage of donor funding. Strategic Investment Programme (with tax In investing to remove constraints relief) induced companies such as Aspen in poor people’s markets, or for inclusive Pharmacare to invest in manufacturing business model development more generally, facilities for generic antiretroviral medicines large companies can also leverage internal for HIV-affected people. Aspen Pharmacare budgets for philanthropy, public affairs and now supplies South Africa’s national corporate social responsibility. In the Banda antiretroviral treatment programme Aceh region of Indonesia, where housing, with approximately 60% of its current factories and basic infrastructure were totally medicine requirements. devastated by the 2004 tsunami, French building company Lafarge chose to invest Finance with reduced cost or patient in local infrastructure while rebuilding and capital. In contrast with grant funders, reopening its cement plant. It constructed reduced cost or ‘patient capital’ investors 500 homes, schools and mosques that expect returns—however large or small— benefited local inhabitants as well as from their investments in inclusive business Lafarge employees. While enhancing models. In Ecuador, Hogar de Cristo, Lafarge’s local image, the initiative also a housing nonprofit organization that showcased the constructs houses and provides mortgage products to the poor, received a large block Mexico of patient loans from the Inter-American Photo: Inter-American Development Bank Development Bank to expand its steel frame house and microcredit product lines and to strengthen financial management to reduce bad loans.13 Investors are willing to bear the opportunity cost associated with the below-market or longer-term returns that inclusive business models may yield because of economics, uncertainty or the need to invest in removing market constraints. They seek to generate social value in addition to financial value. They invest in businesses because they believe profitable

64 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure 4.1. Summary: Approaches for investing in markets to remove constraints

Constraints Adapt Strategy 2 Leverage Combine Engage products and the strengths resources and in policy processes Invest in removing of the poor capabilities dialogue with market constraints with others government

Market § Do market research information § Build financial products or services

Regulatory environment

Physical § Build infrastructure infrastructure

Knowledge Cross-cutting § Improve supplier performance and skills § Raise awareness and train consumers Use grants, donations and subsidies donations grants, Use §

Access to capital or patient cost with reduced Finance § Capture the intangible

financial § benefits products and services

models can generate social value most various preferences about the size, industry, effectively and sustainably. home or host country or other characteristics Reduced cost and patient capital have of the businesses in which they invest. several sources, including corporations, Examples of how inclusive business foundations, nongovernmental organizations, models have profited from ‘blended value’ government agencies, and ‘blended value’ financing include: investment funds, which may incorporate A public-private partnership for 14 capital from all those sources. producing insecticide-treated bed nets Different sources can set different to prevent malaria. Through a patient requirements for the magnitude of the capital loan from Acumen Fund, expected financial and social returns and Sumitomo transfers technology and for the balance between them. Typically, chemicals to A to Z Textile Mills, the lower the expected financial return, the which buys resin for the nets from greater the expected social return—and the ExxonMobil, which has donated funds more stringent the requirements for social to the United Nations Children’s Fund impact or performance reporting. to buy long-lasting nets for the most Different sources also set different vulnerable children. A to Z now produces expectations for when financial and social 8 million nets a year and employs about returns must start materializing. Some sources 5,000 people (up from 1,000 before its of patient capital are more patient than ‘discovery’ by Acumen Fund), 90% of others. As with traditional commercial them unskilled women. Besides making investment, socially minded investors have the enterprise possible, patient capital

CHAPTER 4. INVEST IN REMOVING MARKET CONSTRAINTS 65 economy—the company purchases from 7,500 local farmers, who earn more from the crop than they would from maize.16 An Egyptian company focusing Egypt: Sekem’s on biodynamic agriculture. Sekem, workforce totals 2,850 employees collaborating with business partners in and small farmers, Germany and the Netherlands, has and about 25,000 obtained financial assistance from people benefit the European Commission, the Ford from its development initiatives. Foundation, the US Agency for Inter- Photo: Sekem also allowed the company to experiment national Development, Acumen Fund and improve until its assessments of and the German Development Finance costs and pricing were accurate for Organization. The International Finance markets in local communities. Corporation provided a $5 million loan and technical assistance to help strengthen A private holding company in Kenya supply chain links with farmers. Sekem that is primarily involved in the has grown, with revenue of $19 million production of low-cost, pharmaceutical in 2005 and a workforce of 2,850 grade artemisinin and artemisinin- employees and small farmers. About based derivatives—one of the main 25,000 people benefit from its ingredients used to treat malaria. development initiatives.17 Advanced Bio Extracts Ltd. was started with patient capital from Novartis, which Reduced cost and patient capital have so far also provided management and strategic targeted mostly smaller, early-stage companies assistance while accepting below- and financially sustainable social enterprises market returns.15 Patient capital further rather than entrepreneurial projects within sustained the enterprise through a larger and better-established multinational cash crop crisis and helped the factory companies. They often come with technical establish world quality classification. The assistance: for example, in management, in result: a successful enterprise with positive business planning or with introductions to externalities for health and for the local business contacts or next-stage financiers.

1 Porter 1998. 2 IRC 2007. 3 Ganchero, Elvie Grace and Chrysanti Hasibuan-Sedyono. 2007. Rajawali’s Express Taxi: Working with Taxi Drivers as Business Partners in Indonesia. UNDP, p. 9 4 The Indian Express 2005. 5 Tata website (www.tata.com) and Madhukar 2006. 6 Wise and Shytlla 2007. 7 UN Department of Economic and Social Affairs and UN Capital Development Fund 2006, p. 109. 8 UN Department of Economic and Social Affairs and UN Capital Development Fund 2006, pp. 49–51. 9 Rodrik 2004. 10 Gibson, Scott, and Ferrand 2004, p. 20. 11 Lonmin website (www.lonmin.com/main.aspx?pageId=111). 12 Arnst 2004. 13 Constance 2007. 14 WEF and Global Foundation Leaders Advisory Group 2005, p. 3. 15 Novogratz 2007. 16 Advanced Bio-Extracts Limited 2007. 17 For more Egyptian examples, see Iskandar 2007.

66 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 5 LEVERAGE THE STRENGTHS OF THE POOR

Kenya: In slums, The HealthStore Foundation engaged local nurses and community health workers as microfranchisees of for- profit pharmaceutical outlets and clinics. Photo courtesy of Acumen Fund

Building inclusive business models can be daunting, especially for companies that lack experience doing business with the poor. Some of the greatest resources for conquering that challenge are found among the poor themselves. To leverage poor people’s strengths—working with them and building on their social networks—is to reach deep into communities. When the poor take over some tasks in a business model, transaction costs for the business decrease while the poor receive new income opportunities. Moreover, poor people are efficient and reliable at linking their communities to the broader market. They have the knowledge and incentives to establish such links. And their strong social networks can often bridge market gaps and make up for missing enabling conditions (box 5.1). As the strategy matrix shows, leveraging the strengths of the poor is used frequently to deal with most of the five broad constraints discussed in chapter 2— but most frequently of all, this strategy is used to address limited market information.

67 Box 5.1. Case Study – The HealthStore Foundation: providing health care in remote areas Malaria affects about 300 million people worldwide. It is one of several infectious diseases that, together, account for 70%–90% of childhood illness and death in developing countries—and that are treatable with inexpensive generic drugs. Every day, for lack of those drugs, more than 25,000 children die.1 When Scott Hillstrom, founder of the The HealthStore Foundation, observed the market for medicine in Kenya, he saw a broken system with inadequate and low-quality drug supplies. At the same time, he saw an opportunity to ‘prevent needless death and illness in the developing world by sustainably improving access to essential drugs and basic health services.’2 If people were selling bad drugs to make money, Scott reasoned, selling good drugs might also be profitable. Scott’s major challenge was to distribute drugs in remote parts of Kenya. While 80% of Kenya’s doctors live in cities, 70% of its people live in rural areas. The need for medicine was greatest in rural areas, but few clinics or pharmacies existed there, and inadequate roads made many villages difficult to reach. Scott aimed to provide these areas with affordable, quality, in-stock medicine and to establish clinics located no more than an hour’s walk from the people they served. To achieve those ends, Scott’s business would need to build its own market, raising awareness in Kenya’s rural communities and finding innovative ways to make contracts effective. With no trusted media or functioning law enforcement systems, the only way to establish a market for his medicines—raising health awareness, ensuring effective treatment and guaranteeing profitability for the HealthStore Foundation’s shops—would be to build trust with communities. Scott’s solution was to engage community members as microfranchisees, creating local drug distribution networks. Owned by nurses or community health workers who know their clients’ needs, the for-profit franchises enable the HealthStore Foundation to distribute enough affordable drugs and to provide basic health care services to many remote communities.

Engaging with poor communities is a in the market and to make collaborations mutual learning process. Companies learn work. Poor people receive new information, about local preferences, needs and capabilities. upgrade their skills, take on new roles and They learn to design processes that function gain confidence.1 Development practice has produced a rich set of methods and approaches to STRATEGIES engage the poor, primarily because develop-

Adapt Invest in Leverage Combine Engage ment experts have long understood the products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government need for two ingredients for work in poor communities to succeed: local embeddedness and trust. Local embeddedness offers access Market information to local networks, resources and fine-grained information, making operations efficient

Regulatory and building trust. And trust is a core asset environment where poverty prevails, and where the formal systems common in developed

Physical countries—such as those for enforcing infrastructure contracts—are largely absent.

CONSTRAINTS Local embeddedness and trust are

Knowledge and skills equally important to the success of inclusive business models.2 Personal experience and relationships are central to the decisions that Access to financial poor people make. They will greet new entrants services to their markets with suspicion until they are persuaded that they can be relied on.

68 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Using recommendations from church organizations, The HealthStore Foundation recruits franchisees with business sense, strong personalities and good community connections. The Foundation provides startup loans and ongoing support, including training, logistics, financing and marketing. In return, they agree to contribute a fee, maintain company standards and reach out to their communities.

The model has proven very successful. In 2005 alone, more than 400,000 low-income patients were treated in 11 Kenyan districts through 63 outlets. Millicent, the first to open a child and family wellness clinic in the Kibera slums in 2004, gained her community’s trust and now makes $1,000–$1,280 a month. Her business is successful enough that she took her family on vacation for the first time, has educated her son in a private school and is planning to buy a house.

Dora, another nurse franchisee, is also making a real difference in her community while earning a decent income and gaining self-confidence. During the recent violence in Kenya the value of Dora’s business—and Scott’s—to poor Kenyans was dramatically revealed: ‘They persuaded the mob to spare my clinic. They said they needed the medical services and that I was there to assist them. Ultimately they would all suffer from not having a pharmacy and a small health facility.’

1. WHO 2007. 2. The HealthStore Foundation mission statement. 3. CARE Newsletter, January 2008.

In poor people’s markets, local individuals and organizations have knowledge and established relationships that give them advantages over external entrants. Local people do not need to cultivate trust and rapport, immerse themselves in the environment to understand it or research local needs and practices. From participatory rural appraisal methods, which use local knowledge for situation assessments, to community organizing and community-based decisionmaking, inclusive business models can build on methods already proven in development practice to understand their target markets and build relationships with suppliers and customers.

ENGAGE THE POOR AS INDIVIDUALS

Companies that include poor people in Establish local service providers. business value chains benefit from their Co-create innovations with the poor. unique assets: local knowledge and trusted relationships. The poor, in turn, benefit from Involve the poor in market research. new sources of income and new skills. Inclusive business models can: Since the 1980s many tools and techniques have been devised for gathering information from Involve the poor in market research. poor people. One example is participatory Train the poor to be trainers. rural appraisals, which use oral rather than Build local logistics networks. written communication and reduce the

CHAPTER 5. LEVERAGE THE STRENGTHS OF THE POOR 69 obtaining market information through community involvement more efficient. In agribusiness, timely information about who produces what is important for both buyers and sellers. Prices can be highly volatile without a mechanism to balance local variations in production. At the rural information centres of Chinese computer provider Tsinghua Tongfang, service agents collect information from the farmers, who go there to obtain such information as weather forecasts or supplier contacts. Asking the farmers about their current and planned production, the agents post the answers on the Beijing Rural Information Centre website, which then helps other farmers to adjust their production and thereby increase their revenue. The website can also help buyers of agricultural products— China: Information about rural retailers or food and animal feed producers— farmers’ planned production is find out where to buy them. available on the website of the Beijing Rural Information Centre, allowing other farmers to adjust distance between Train the poor to be trainers. their own plans. them and their Investments in training and education are interviewers. often required for inclusive business models These appraisals have shown that village to succeed—and these investments can be inhabitants can describe the assets and quite costly. Training people from the characteristics of local families with surprising community to be trainers and educators, precision, yielding estimates that are as however, can ‘snowball’ the benefits of the accurate as formal appraisals and much instruction far beyond an initial circle of less time-consuming and costly.3 trainees. Local trainers speak the local Similarly, slum housing surveys can language and enjoy the community’s trust. efficiently capture information about In addition, enabling poor people to be unfamiliar market environments. In 2005, trainers empowers them, giving them a the Centre for Urban Studies of Bangladesh, special status in their community. working with the US Agency for International Farmer-to-farmer trainings have Development, conducted a large slum survey successfully extended agricultural practices. in 2005 to identify the main slums (by New farming or husbandry methods are population size and number of households) spread through group learning, with one and to record such facts as their water farmer guiding the rest. This approach has source, means of sanitation and power proven effective, not only because farmers supply. A team of trained field investigators take their peers’ advice seriously, but also entered the slums and identified key because practices are adapted to local informants—community leaders, teachers, conditions. The training process thus has shop keepers and nongovernmental an inherently innovative component, as organization workers—who shared their farmers are encouraged to experiment knowledge about each slum’s inhabitants with and compare alternatives. and characteristics.4 Community-led training is also being Information and communications applied successfully in banking. South technology can sometimes be used to make African commercial banks Nedbank and

70 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Rand Merchant Bank have community to supply chain management and training. mentorship programmes to educate The HealthStore Foundation’s profitable customers from low-income areas about microfranchises in Kenya are one example their products. In a collaboration with (see box 5.1). Agence Française de Développement, the two banks offer innovative financial products Establish local service providers. targeted at the low-income housing market. Service and maintenance providers in poor Nedbank and Rand Mercantile Bank train people’s markets must respond to clients’ community mentors on their services, and needs quickly, but they often cover dispersed the mentors pass this knowledge on to populations in areas with inadequate physical potential clients. The programme educates infrastructure and logistics networks. Only target customers while building trust, local providers can successfully do that. helping to bridge the gap that apartheid Lydec works with ‘street representatives’ created between white financiers and to manage its water and electricity operations black customers. in Casablanca’s shantytowns. Members of the local community, the representatives are Build local logistics networks. charged with co-ordinating the work daily Engaging poor people can help businesses and with providing technical support to an collect, distribute and sell in markets with average of 20 households each. In addition, inadequate physical infrastructure and they collect payments from the households logistics systems. For example, businesses can they serve. approach small vendors or other providers More than other services, health care to offer a new product. In the Philippines, depends on regular and reliable provision. RiteMed engaged pharmaceutical outlets High child mortality rates in many and persuaded them of the business developing countries are caused mostly by a opportunity in selling generic drugs at lack of medical attention and limited access higher volumes, albeit with a lower profit to health care. Mali’s Pésinet has an early margin. RiteMed sales topped $20 million in warning system for monitoring children’s 2006. And CEMEX’s distribution network health and detecting potentially fatal for construction materials in Mexico includes diseases such as malaria and measles early. more than 2,000 small and medium-sized Combining technical innovation with local retailers from urban and rural areas. community engagement, the company Microfranchising is another way to scale offers a powerful model of efficient health up local distribution networks. The principle monitoring. Pésinet identifies and trains of microfranchising is identical to that of local representatives—mostly women—in its bigger brother: a streamlined business the outskirts of Bamako. Parents enroll in model, easily replicated. To make franchising work at the micro scale, the model must succeed with a low initial investment (perhaps supported by a microcredit system that avoids burdening franchisees with early debt servicing). The benefit for franchisees is a proven, turnkey business model that requires less risk and experiment than a startup. But microfranchising also offers backbone services from product development

Madagascar: Farmer-to-farmer trainings can successfully extend agricultural practices. Photo: Adam Rogers/UNCDF

CHAPTER 5. LEVERAGE THE STRENGTHS OF THE POOR 71 hold promise: the lead user method, immersion and innovation workshops. The lead user concept developed by Professor Eric von Hippel, Head of the Innovation and Entrepreneurship Group at the Massachusetts Institute of Technology’s Sloan School of Management, is widely applied in consumer-led innovation today. Lead users have a need that will become relevant to other users, and—because they perceive significant benefits to themselves Benin: A pharmacist from meeting that need—they develop ideas greets visitors at a about how to meet the need by using or health clinic. the programme and adapting existing products.6 For example, Photo: UNICEF/Julie Pudlowski have their children Haier, the Chinese home appliance company, weighed twice a week discovered its customers were using Haier by ‘Pésinet ladies’, who washing machines not just to wash clothes send the data electronically to an associated but also to clean vegetables. So, Haier doctor. When a weight reading is anomalously adapted its washing machines to make low, the doctor requests a visit with the child. them better at cleaning vegetables. One doctor can care for about 2,000 children. Originating in anthropological research The project is financially sustainable with at least 1,200 children and a monthly and development practice, immersion entails subscription fee of just $1.05. lengthy integration into poor communities as a participant rather than a mere observer. Company representatives and project facili- Co-create innovations with the poor. tators visit a slum or rural village for two to Poor people can contribute at every stage three months, establish relationships and use of the value chain—and they can become those relationships to develop a business innovators, developing new business models. model with the networks to support it.7 Integrating poor consumers into the Intel, Motorola and Nokia employ ‘user innovation process helps to: anthropologists’ or ‘human-behaviour Capture information about consumers researchers’ who both immerse themselves and their ways of using a product. and conduct various sample interviews with Uncover ‘sticky’ knowledge—information potential users to map possible functions for that consumers have, but will not bring a product. According to the New York Times, forward because they are unaware of it ‘influenced by [an anthropologist’s] study on or its importance or unsure how to the practice of sharing cellphones inside of express it. families or neighbourhoods, Nokia has started producing phones with multiple address Identify needs and solutions. books for as many as seven users per phone.’8 In the words of Ted London—Director Immersion has been included in the Base of the Base of the Pyramid Initiative at the of the Pyramid Protocol, led by Professor University of Michigan’s William Davidson Stuart Hart of the Johnson School at Institute—an integrative business develop- Cornell University, to understand target ment approach can ‘combine the knowledge market conditions and ‘co-create’ inclusive developed at the top of the pyramid with the business models.9 wisdom and the experience at the bottom in Innovation workshops can be an a way that best fits the local environment and efficient way to engage poor consumers in enables co-discovery of new opportunities to further developing a business that already serve [the poor].’5 Three tools in particular has local relationships and good community

72 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR networks. A well-designed workshop will frequent group meetings, first surfaced generate a creative interaction between through such interactions with clients. the business and consumers, who thereby Necessity is the mother of invention, contribute their knowledge about the uses goes the proverb. With few resources and of a product (or related products). Such little access to goods and services, poor knowledge, combined with the company’s people must invent to get by. Including them technical expertise, can lead to new solutions.10 in the development of a business—in a way For example, K-REP Bank, a Kenyan microcredit provider, uses meetings with its that encourages and values their input—can clients to request feedback and develop enable their ideas to greatly enhance design. improvements to customer services. Some For poor people, this means not only that of K-REP’s most promising innovations, they can benefit from better products but including flexible loan sizes and more also that their voice is heard.

BUILD ON EXISTING SOCIAL NETWORKS

A community is more than its parts. Inclusive business models can benefit Where poverty prevails, the informal rules by collaborating with poor communities to: that communities establish and enforce are Leverage informal contract often more effective than formal rules. enforcement mechanisms. In addition, a community can enable its members to help each other and share Expand risk-sharing arrangements. resources, facilitate co-operation to provide Co-ordinate investments into common goods (such as wells, mills or common goods. schools) or supply an infrastructure for savings, credit or insurance mechanisms. Bangladesh: A local women’s group provides instruction on nutrition, health and basic mathematics to help develop basic business skills. Photo: Shehzad Noorani/The World Bank

CHAPTER 5. LEVERAGE THE STRENGTHS OF THE POOR 73 Leverage informal contract enforcement models. Manila Water, for example, has used mechanisms. Social networks facilitate it to facilitate its billing process and stop individual and collective activity by establishing theft from its pipelines. The company trust, reciprocity and common rules. They can formed co-operatives in poor communities help enforce contracts where the regulatory to take responsibility for water connections. environment is not supportive. The design of It installed ‘mother metres’ to measure a business model can create incentives for all consumption by the community and participants to ‘play by the rules’. ‘submetres’ to measure the consumption of Microcredit owes much of its success each family. While the community as a to the incentives it creates through group whole must pay for the amount shown on lending. Since all borrowers in a credit the mother metre, each family settles its own group know that their access to credit will bill with a community representative based depend on the compliance of other members, on its submetre reading. The result: no one only people known to be reliable are allowed in the community has an interest in allowing to join the group—and the group ensures theft. An additional benefit is that some that members repay their loans on time. administrative costs are transferred to The credit group thereby takes over the tasks the community, allowing the company to of screening, monitoring and enforcement. charge less. With this system, Manila Water By providing credit to groups rather than supplies water to 140,000 low-income individuals, the microcredit system has households—more than 10 times as many created alternative incentives that have as when it took over the license—and has made its compliance rates better than those achieved a profit of $37 million on revenue achieved through traditional, collateral- of $108 million. based lending.11 The group enforcement system has been Expand risk-sharing arrangements. translated to a number of other business Communities typically develop some form of risk sharing, either through common savings or through an agreement to support each Colombia: The National Federation of Coffee Growers counts more than 566,000 members, most of whom are small-scale producers. Photo: Luis Felipe Avella

74 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure 5.1. Summary: Approaches to leveraging the strengths of the poor

Constraints Adapt Invest in Strategy 3 Combine Engage products and removing resources and in policy processes market Leverage the strengths capabilities dialogue with constraints of the poor with others government

Market § Involve the poor in market research information

Regulatory § Leverage informal contract environment enforcement mechanisms

Physical § Build local logistics networks infrastructure § Establish local service providers § Co-ordinate investments into common goods

Knowledge § Train the poor to be trainers and skills

Access to § Expand risk sharing arrangements financial products and services

other in time of need. Businesses that as a reserve against dips in the volatile coffee include the poor as producers can expand market. During the ‘coffee crisis’ of the early these risk-sharing mechanisms and make 1990s, this insurance mechanism compensated them more effective. For example, they can for the farmers’ $1.5 billion shortfall. help spread such mechanisms beyond single communities, protecting participants even Co-ordinate investments into common in case of a community-wide loss. In this goods. Without co-ordination, common way, a company can help producers invest, goods will be insufficiently provided because improving their production and, in turn, of the ‘tragedy of the commons’—when the improving the company’s supply. community as a whole uses common goods Juan Valdez is a chain of coffee shops but no member is willing to bear their cost. in Colombia and other countries, owned by An inclusive business model can invest the National Federation of Coffee Growers part of its revenue from product sales of Colombia. The shops are a premium- in common goods. Or it can require a price outlet for Colombian coffee from the community to make such investments (as Federation. Thanks to the premium price in the Juan Valdez risk-sharing model). and the elimination of intermediaries, The fair trade system for example, as producers get 25% more than the standard illustrated by the fair trade cotton model Colombian price for the same coffee. To in Mali, requires each co-operative to spend guarantee its members a minimum price, a part of the additional income gained the Federation holds some Juan Valdez through the fair trade label on projects revenue from periods of high coffee prices that benefit the community.

CHAPTER 5. LEVERAGE THE STRENGTHS OF THE POOR 75 In Pakistan, Saiban gives poor people Another example of co-ordinating access to plots of land at affordable rates. investments into common goods—with Services are initially limited to the basics: a results that benefit the business while communal water supply and public transport helping poor community members—is to the city centre. Later, when enough the nongovernmental organization set up monthly instalments have accumulated, they by Tiviski, the Mauritanian dairy company. are used to finance more services (house-to- Financed through revenues from the house water connections, sewerage, electrici- company’s milk sales, the organization ty, road paving). The self-financing project offers animal feed, credit and veterinary creates an incentive for inhabitants to organ- care to camel herders who formerly lacked ize themselves and quickly amass enough such services, which in turn limited the funds to obtain needed facilities.12 company’s growth.

1 The World Bank Participation Sourcebook 1996, p. 8. 2 Hart and London 2005, pp. 28–33. 3 Chambers 1994. 4 Centre for Urban Studies 2006. 5 London 2007. 6 Von Hippel 1986. 7 Corbett 2008. 8 Corbett 2008. 9 Simanis and others 2008. 10 Gruner and Homburg 2000. 11 Mendoza and Thelen, forthcoming. 12 Siddiqui 2005.

76 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 6 COMBINE RESOURCES AND CAPABILITIES WITH OTHERS

Mexico: In collaboration with consulates and migrants’ clubs, Construmex helps families in Mexico build or buy decent homes through cash-to-asset transfers from their US-based relatives. Photo: Cemex

Like all business models, inclusive business models often succeed by engaging other businesses in mutually beneficial partnerships and collaborations. For example, CEMEX works closely with a network of more than 2,000 small and medium-sized local retailers to distribute construction materials purchased through Construmex by Mexican migrants in the United States to their families in more than 1,200 locations in Mexico. It also has an agreement with DOLEX, one of the largest remittances transfer operators in the United States, to facilitate its clients’ payments at more than 800 points of sale. For inclusive business models, a strategy as important as engaging other businesses is creating partnerships with nonbusiness partners. These partners can include churches, farmer co-operatives, microfinance institutions, nongovernmental organizations with a human development mission and public services organizations such as schools, hospitals, local municipalities and national government agencies. Collaboration is applied frequently to tackle almost all constraints. Not visible in the matrix is that collaboration is often used in conjunction with or as an

77 Box 6.1. Case Study – Construmex: ‘Hazla, Paisano!’ Many poor people cannot afford to plan for the future. In Mexico, however, Construmex is empowering thousands of poor people and their extended families to own permanent homes.

Construmex helps Mexican migrants living in the United States use cross-border income to buy, build or repair homes in their native land. In 2006, when the business was developed, billions of dollars in remittances were flowing into Mexico from expatriate Mexicans. Yet an estimated 25 million people in Mexico were living without adequate shelter. The shortage signalled a clear deficit in the country’s housing market. CEMEX—one of the top three global cement producers, and by far Mexico’s largest construction company—saw an opportunity.

CEMEX had a long-established market of low-income Mexican consumers. It had already succeeded with its construction microloan project, Patrimonio Hoy. As its social solutions director, Hector Ureta, observed: ‘Thanks to these initiatives we engage with [low-income customers], creating value for the community, for our value chain, [and for] small and medium-sized distributors, as well as for the company.’

But meeting the demand of migrants in the United States presented complex challenges. Those migrants turned out to have much less liquid cash than the company initially believed—and a history of abuse, fraud and violent threats had made them wary of all housing remittance plans. CEMEX needed to gain the migrants’ trust, in addition to learning about their needs and aspirations.

So CEMEX, in putting together a business model for Construmex, obtained help by collaborating with existing organizations. Construmex engaged Mexican consulates in several US cities to learn more about customers’ priorities and their satisfaction with its products. Partnering with migrant clubs in

enabler for other strategies, such as Inclusive business models engage when businesses work with community organizations in two ways. The first is development organizations to engage the to combine complementary capabilities. poor or organize collective action to Every business seeks to configure a set of engage in policy dialogue. capabilities into a ‘core competency’ that will enable it to compete profitably, while other necessary capabilities can be sourced STRATEGIES externally.1 Such engagements range from

Adapt Invest in Leverage Combine Engage the loose links between suppliers and products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government vendors to the deep involvement of strategic business partnerships.

Market A second way to engage other information businesses or organizations is to pool resources. Intended to gain scale or to

Regulatory environment promote common goals, this practice is less common, because businesses risk losing competitive advantage to ‘free riders’. Still, Physical infrastructure successful examples exist—from smaller collective initiatives that achieve specific CONSTRAINTS goals (regional companies joining to provide Knowledge and skills training programmes or employee services) to much larger collaborations (pharmaceuti-

Access cals firms pooling resources for research to financial services and development).

78 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR several Mexican states, it implemented community-improvement initiatives to build trust—and its brand— with its core market. It also benefited from a matching-funds initiative from the country’s Ministry for Social Development for donations in support of community infrastructure. These win-win collaborations, in equipping the firm to effectively deal with its target market and meet its needs, helped make Construmex viable as an enterprise and enabled a host of accompanying benefits to development.

Construmex’s slogan, ‘Hazla, paisano!’ translates to ‘You can do it, compatriot!’ The company has followed through on that assurance. Through the simple act of allowing poor people fair access to stable and safe homes, Construmex is building not only houses but also self-esteem, security and hope for the future. By the end of 2006 Construmex had received more than 18,000 orders for the delivery of construction materials. Women made up 23% of its clientele. Construmex clients will be better able to save money in the future because their houses will not need as much work. And the initiative’s community-development efforts are strengthening the fibre of the places where it works.

Construmex is on the verge of becoming sustainably profitable. In its first four years, it saw $12.2 million from sales of its construction materials, and that number is poised to rise as its reach spreads. ‘Our social initiatives allow us to establish a missing link: a direct relation with our low-income clients’, says Ureta.

COMBINE COMPLEMENTARY CAPABILITIES

The York Institute for Research and Acquire market information. Where Innovation in Sustainability’s case studies no data are published to help a business show that in developing countries sustainable understand its target market and evaluate enterprises thrive in a dense network of its potential, organizations already working organizations—including for-profit businesses with the target group will have qualitative and not-for-profit organizations and knowledge about its skills, preferences and development agencies.2 Inclusive business other characteristics. They may also have models can succeed by engaging all these valuable quantitative data. Public administra- organizations and benefiting from their tions, development banks and other donor capabilities, in particular to: organizations can sometimes provide Acquire market information. relevant statistical information or industry studies. CEMEX partnered with Mexican Leverage existing logistics networks. consulates in major US cities to carry out Impart knowledge. market research among Mexican migrants Promote training in needed skills. (box 6.1). Businesses and civil society organizations Make sales and provide services. can provide information about the competitive Facilitate access to financial products landscape, in particular about potential and services. partners and allies. In 1997, Bangladeshi

CHAPTER 6. COMBINE RESOURCES AND CAPABILITIES WITH OTHERS 79 Box 6.2. How to find a partner— without a partner? microfinance institution Grameen Bank and Norwegian telecommunications firm Telenor entered a joint venture— GrameenPhone—to provide people in Below is a brief overview of some existing brokering Bangladesh with telecommunications and initiatives and institutions. This list is not nearly exhaustive, and many more partnership brokers exist, especially on new income sources. Grameen had the local the national, regional and local levels. infrastructure, operations and reputation; Telenor brought technical expertise and Multilateral development agencies investment capacity. Their idea was to build § IFC’s Business Linkages programme and Grassroots Business Initiative a microfranchise system whereby Grameen customers could buy telephones and then § Local Global Compact networks rent them out to neighbours. Among its § UNCTAD’s Business Linkages programme microcredit clients, Grameen identified § UNDP’s Growing Sustainable Business Initiative 100,000 ‘village phone ladies’, who as § UNIDO’s Industrial Subcontracting & Partnership microfranchisees now account for 10% of eXchange Programme (SPX) GrameenPhone’s revenue.3 As Nicholas Bilateral development agencies Sullivan writes, mobile phones became the § DFID’s Business Linkages Challenge Fund ‘new cows’, rivalling the productive asset in § GTZ’s Public-Private Partnership programme which most women had invested their loans.4 § Netherlands Development Organization (SNV) and It is not always easy to find a good WBCSD’s Inclusive Business Alliance partner for a new business model, especially § USAID’s Global Development Alliance in markets where information is scarce. Nongovernmental organizations ‘Partnership brokers’ can perform an important intermediary role: they pool information § Ashoka about organizations from different sectors § Enablis that are open for collaboration, help find § Endeavor the right partner for specific projects and § Strategic Business Partnerships for Growth in Africa provide guidance on how to design and § Thailand Business Initiative in Rural Development manage collaborations (box 6.2). § TechnoServe § Youth Business International Leverage existing logistics networks. Where physical infrastructure is inadequate, Business associations or networks collecting and distributing products require § IBLF and Overseas Development Institute’s Partnership Brokers Accreditation Scheme (PBAS) logistics solutions. An inclusive business model can leverage other organizations’ § Global, regional and national chambers of commerce (such as the Confederation of Indian existing logistics networks. Where the for- Industry, Trade Information Network) profit sector is largely absent, nongovern- § National Business Initiative in South Africa mental organizations and public services § Philippines Business for Social Progress (PBSP) often have such networks. § WBCSD's regional Business Councils for Sustainable More than logistics challenges can be Development met, for example, through the health sector. § World Economic Forum’s Business Alliance Against Doctors Without Borders is a nongovern- Chronic Hunger mental organization with an extensive National public entities and public-private partnerships network in Sub-Saharan Africa that § Business Trust (South Africa) brings emergency aid to people affected by § National initiatives for economic and sustainable epidemics, armed conflict and other natural development (such as the South Africa National or human-caused disasters. Pharmaceutical Economic Development and Labour Council) firm Sanofi-aventis collaborated with § Water & Sanitation for the Urban Poor (WSUP) Doctors Without Borders to distribute its drugs against sleeping sickness. Source: Adapted from Nelson 2007.

80 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Mexico Photo: Inter-American Development Bank Their capabilities were complementary: Poland, Danone built on the Sanofi-aventis provided drugs and financial government’s unique capability to backing, and Doctors Without Borders used communicate the benefits to children’s its medical and logistics capabilities to nutrition from its product Milk Start, which administer the drugs in remote locations. targets low-income families. It launched The collaboration has helped 14 million social activities to raise awareness about patients in 36 countries. child health with partners, including media, schools and government representatives, who drafted 12 clear and simple principles Impart knowledge. Collaborating with for healthy nutrition. In one initiative, the other organizations opens communication 12 principles were adopted for the ‘We Are channels, especially where media density and Growing Up Healthy’ programme of the literacy rates are low. Organizations with this Office of the Governor of Swietokrzyskie capability include schools and universities, region. Teachers in the region used special health services and public administration. educational packs, including a sample of In Madagascar, Bionexx cultivates Milk Start, during meetings with parents artemisia annua, a medicinal plant used and children. in malaria treatments. The company finds it difficult to increase production because Promote training in needed skills. farmers see no value in growing the plant. Organizations able to provide training to To raise awareness of the plant’s benefits and people in rural villages or urban slums are to overcome farmers’ reluctance, Bionexx has typically nongovernmental organiations or partnered with a local religious radio station public programmes, with missions such as to spread information.5 rural development, health and hygiene, Engaging governments through collabo- family planning, or literacy and other rative public awareness-raising campaigns capacity building. Collaborating with not only provides information but can also established organizations can help to build increase the credibility of a business. In trust in trainees.

CHAPTER 6. COMBINE RESOURCES AND CAPABILITIES WITH OTHERS 81 Box 6.3. Microfinance institutions— the rural retail agents?

In many countries, microfinance institutions are among the organizations with the most extensive networks. Credit and savings groups assemble even in remote villages. This capability has not gone unnoticed by other businesses.

In India, for example, microfinance institution BASIX offers not only credit and savings services, but also crop, health and livestock insurance; other financial Madagascar services such as remittances transfers and agricultural and business development services; and institutional Photo: Adam Rogers/UNCDF development services such as facilitating policy dialogue. Among its clients are the rural and urban poor, including many women.1

Working with a microfinance institution as a logistics channel has the advantage that financial services can be provided together with the collection or delivery of other products or services. An example is the collaboration between BASIX and Pepsico for Frito Lay’s chip-grade potato farming. In 2006–07, more than 1,100 farmers participated in this venture, which brought significant increases in crop yields, access to credit and crop insurance and quality planting material to fields. BASIX is expected to manage Frito Lay’s procurement process of 4,000 tons of potatoes in 2008.

1. BASIX 2007.

Amanco, for example, works with local organizations and community representa- nongovernmental organizations in Guatemala tives; and provided training and technical and Mexico to teach farmers about its advice to ANZ staff. The partnership is a irrigation systems. The organizations success, with 54,000 rural accounts opened demonstrate the use and benefits of the in the first 18 months and 400 microloans systems. Farmers who adopt the systems approved within a year. It is currently being are then trained in using them. Since the replicated in other Pacific Island countries.6 farmers are already familiar with the nongovernmental organizations’ extension Make sales and provide services. services, they welcome the demonstration The quality of sales and service provision and accept the information provided. The depends largely on availability. Building on model has helped Amanco succeed—with other organizations’ existing networks is net Latin American and Caribbean sales often more efficient than building a new reaching $688 million in 2005—while one (box 6.3). benefiting farmers, local microenterprises In Ghana, Barclays Bank found a way and the environment. to work with the Ghana Susu Collectors In Fiji, which has a large population that Association that benefited both partners. lacks access to formal banking, ANZ Bank Susu is a traditional system in many African and UNDP are collaborating to improve countries whereby collectors regularly pick access to finance. ANZ Bank is establishing up savings from households, which pay a a rural banking service, with six mobile small fee. They also offer small, short-term banks that travel regularly to 250 villages. loans. Ghana has about 4,000 Susu collectors UNDP provides the necessary training who serve between 200 and 850 clients a services: it has developed a Financial day. The collectors can now store money Literacy Programme for rural communities; safely at Barclays branches, where it benefits trained key intermediary organizations, them and their clients by earning interest. including local authorities, nongovernmental The bank trains them in financial manage-

82 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR ment, enabling them to provide this service esting social aspect and regional develop- to their customers. Barclays in turn receives ment potential. Moreover, it brings the access to the collectors’ existing clients. potential of new clients in a region where The bank benefits from collectors’ good the bank has little penetration.’ By 2012, relationships with clients and knowledge seven years into the programme, it is expect- about them. The programme increases the ed to reach a financing volume of $30 mil- bank’s cash flow without having to expand lion and to have benefited 20,000–25,000 its own network. And the bank sells other producers. services, such as small business credit, The Indian hospital group Narayana through the collectors. Hrudayalaya created an insurance scheme to One of India’s largest private sector cater to low-income patients in partnership banks, ICICI, has engaged nongovernmental with Biocon Foundation and financial microfinance organizations as service agents services provider ICICI Lombard Ltd. to build the bank’s microfinance portfolio. Each month an individual must pay 15 The organizations identify potential micro- rupees (about $3). The insurance includes finance borrowers, make credit decisions, three days of inpatient care for free, and disburse loans on the bank’s behalf and outpatient services at half the standard monitor and service the loans. In return, price. Patients can receive the services in they are permitted to charge borrowers a rural hospitals run by charitable organiza- service fee. Two years after pioneering the tions and by the government. model, ICICI now has more retail micro- Colombia offers an interesting example finance clients than the largest microfinance of how local governments—in collaboration institution in India, which began operating with the private sector—can facilitate access 12 years ago.7 to financial products and services and remove constraints such as lack of information and Facilitate access to financial products skills. ‘Cultura E’ is a programme led by the and services. In markets where access to city government of Medellin that develops finance still eludes the poor, businesses that cedezos, or local centres for enterprise require credit or insurance must facilitate development. Located in the poorest access. Most rely on the capabilities of existing neighbourhoods, cedezos host a microcredit financial service providers to offer integrated network comprising the government-funded financial solutions. Existing providers can Banco de las Oportunidades as well as include microfinance institutions, commercial 14 private microfinance institutions. This banks and government agencies. network directs entrepreneurs to the best- Brazil’s Votorantim Celulose e Papel suited institution based on their needs and (VCP) engaged existing credit providers to resources, while credit fairs provide informa- give eucalyptus growers a credit option that tion about the financial and nonfinancial fit the cash flow of their business. Eucalyptus services offered by the different institutions. can be harvested after seven years. Having financed the planting of the trees through a collaboration with ABN AMRO Real, the initial loan and interest is collected when VCP buys the lumber from the farmers— who can thus plant without prior financial reserves and without needing to use their property as collateral. Maurik Jehee, ABN AMRO Real credit analyst, explains the bank’s objectives: ‘Besides its environmental con- Costa Rica: Organizations provide training in such areas as cerns, [the project] has an inter- literacy and computer skills. Photo: Inter-American Development Bank

CHAPTER 6. COMBINE RESOURCES AND CAPABILITIES WITH OTHERS 83 Cedezos also promote an entrepreneurial skills needed to complete a business plan culture through innovative initiatives, such can receive help from cedezo staff, alongside as a seed capital contest. Every year, entre- participating nongovernmental organizations, preneurs from all over the city are invited to fill out the user-friendly forms. New to submit business plans and apply for entrepreneurs also receive mentoring to government-funded seed capital to launch incubate their business ideas in a physical new enterprises. Entrepreneurs who lack the space until they become independent.8

POOL RESOURCES

If an inclusive business model faces challenges Gather market information. Rating that have been met by other businesses or by agencies provide information about clients civil society or governmental organizations, that is available to all credit institutions, collaboration can be an efficient way to reducing the cost of providing credit and acquire those actors’ capabilities. But what enabling banks to make smaller loans and if nobody in the space has the needed offer lower interest rates. This service, capabilities yet? What if constraints cannot however, is rarely available for small and simply be dealt with but need to be removed? medium-sized enterprises in developing In these cases, success hinges on filling gaps countries—one reason why these target and building the required market conditions. groups often lack sufficient credit. To fill the Sometimes a company can invest privately to gap, ICICI Bank, Standard Chartered and fill gaps in knowledge, skills, infrastructure other national banks in India have created or access to financial products and services the Small and Medium Enterprises Rating (as discussed in chapter 4). At other times, Agency as a joint venture.9 The agency though, the investment is too big to be streamlines credit institutions’ requirements shouldered by a single company, and only for small and medium-sized enterprises, a number of partners, pooling their offering the credit institutions reliable resources, can meet the challenge. assessments of the creditworthiness of Organizing collective action to remove such enterprises. constraints is often challenging, since there is Pooling resources can also be a an incentive to ‘free ride’ on the investments successful strategy when trying to fill gaps in of others. Therefore, resource pools need a market information. The World Economic governance structure to ensure that each Forum’s Business Alliance Against Chronic member contributes its agreed share. That can Hunger seeks to improve value chains—and be done through established intermediaries, thus increase food supplies, nutrition and such as business associations, or by creating incomes in hungry regions—through a dedicated body. global-to-local, cross-industry private sector This section discusses how inclusive engagement with local communities and business models can partner with other partners. The alliance pools information businesses or civil society organizations to: on potential products from the district Gather market information. (gathered at community level), with broader studies of local, national and regional market Fill gaps in market infrastructure. demand (assessed by a local expert think Self-regulate. tank), to identify commercially viable products for investment and development in Build knowledge and skills. a specific pilot district. In Siaya District, Increase access to financial products Kenya, alliance partners are leading 14 pilot and services. initiatives, several in partnership with the

84 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Millennium Villages Project, to expand the Tirupur Exporters Association, and a private production capacity and market opportunities sector financing organization, IL & FS, to for local farmers and small-scale retailers. create a water company—the New Tirupur These projects are led by local and global Area Development Corporation—to tackle companies working with nongovernmental the water and sewage problems of a town organizations, community members and with a textile-based economy and about local and national governments. Too often, 80,000 slum-dwellers. The programme interventions fail because they happen in was initiated through a multistakeholder isolation. By engaging multiple partners dialogue, where local industry was represented, along the value chain, the alliance seeks to to identify infrastructure weaknesses and remove constraints and expand opportunities, declare priorities. The government assumed increasing the likelihood of making a a coordinating role, helping all stakeholders lasting difference. pool their resources. The stakeholders focused on a reliable water supply as a priority Fill gaps in market infrastructure. Since for improvement. So, the partnership included basic physical infrastructure typically lies in its scope the implementation of a consistent, in the domain of government, companies high-quality water supply; a sewage system often collaborate with governments to build with sewage treatment; and low-cost such necessities as roads, ports or electricity sanitation for both the industry, which paid networks. But businesses in the same region high user fees, and the slums, which paid or industry may share a need for more much smaller user fees. To carry out this specialized infrastructure: for example, infrastructure upgrade, the corporation cold chains, sewage treatment plants or installed (and now operates) the water and processing and packaging facilities. To fill sewage system, which is financed exclusively the gaps, they can pool resources through with commercial returns. The textiles collective action or by guaranteeing a companies benefited from improved water provider an agreed amount in sales. services, and private households—particularly In the southern Indian state of Tamil the rural poor—from increased coverage. Nadu, the local government entered into a joint venture with the local export association, The Philippines: Manila Water provides safe water to previously unserved areas. Photo: Manila Water

CHAPTER 6. COMBINE RESOURCES AND CAPABILITIES WITH OTHERS 85 Before the programme there were 43,000 to their value chains, they have a common household connections. The programme has interest in adding to those contributors’ now installed 8,000 new connections, with skills. Such shared interests are common in the capacity to add 17,000 more. commodity markets with several players. In these markets, moreover, it can be against the Self-regulate. Self-regulation can improve interest of purchasers to train suppliers at the regulatory environment without requiring their sole cost: a supplier who benefits from action by policymakers. It can be effective training provided by one purchaser can still where governments cannot help—across sell to another purchaser who offers a better countries, for example, or in conflict situations. price. A solution for purchasers is to pool their In Sierra Leone, DeBeers and knowledge and skills with each other—often Rapaport joined international development through engaging civil society organizations. organizations and governments to form the The World Cocoa Foundation is an Peace Diamonds Alliance, which devises example. Comprising more than 50 companies schemes for purchasing diamonds fairly including ADM, Cargill, ECOM, Hershey, and competitively from small-scale miners. Kraft, Nestlé and Starbucks, the Foundation The alliance helped make legal diamond has worked with the US Agency for exports grow from $1.5 million in 1999 to International Development to help African $70 million in 2003, allowing substantial cocoa farmers in a number of countries 10 revenues to flow back into Sierra Leone. including Cameroon, Côte d’Ivoire, Ghana, Funds were allocated to build schools, markets Liberia and Nigeria through its Sustainable and other public structures. For the first time, Tree Crops Program. The organizations are the country’s diamond fees and royalties were important intermediaries for their members, monitored, miners were informed of the bringing their cocoa to market and supporting value of stones, environmental degradation them with training, sourcing and credit. But was addressed, and the exploitation of they often suffer from a lack of trained staff. miners—especially children—was reduced.11 The World Cocoa Foundation is making the Self-regulation can be effective across cocoa farmer organizations more effective national borders, making it particularly useful and the farmers’ trade relationships more where poor people are contributing to a profitable. The companies in the Foundation global value chain as producers or employees. benefit from improved product quality and Common standards can help an industry reliability of supply. avoid a ‘race to the bottom’ in social and environmental responsibility—which might otherwise be hard to avoid, especially where Increase access to financial products pricing is fiercely competitive. The apparel and services. Companies can share the cost industry has developed an international code of extending access to financial products and and an independent control mechanism to services in hard-to-reach areas. manage social standards in the supply chain. South Africa’s four major banks— The Worldwide Responsible Apparel Absa, First National Bank, Nedbank and Production system certifies compliance Standard Bank—partnered with each other with a code of conduct that covers labour and with the government-owned Postbank practices and customs legislation. Similarly, to locate low-cost, easy-to-use banking garment export manufacturers associations services within 15 kilometres of all South have developed codes of conduct and educa- Africans. The services include automated tional programmes for member companies teller machines and savings accounts called in Bangladesh, El Salvador, Guatemala, ‘Mzansi’. Although the banks now market Honduras and Malaysia.12 the accounts competitively, they shared brand development costs estimated at about Build knowledge and skills. Wherever 15 million rand—or about $2 million.13 companies do similar business and do not The partnership served 3.3 million people have exclusive relationships with contributors from 2004 to 2006.14

86 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure 6.1. Summary: Approaches to combining resources and capabilities with others

Constraints Adapt Invest in Leverage Strategy 4 Engage products and removing the strengths in policy processes market of the poor Combine resources dialogue with constraints and capabilities with others government

Market § Combine capabilities to acquire information market information § Pool resources to gather market information

Regulatory § Self-regulate environment

Physical § Combine capabilities to leverage existing infrastructure logistics networks § Combine capabilities to make sales and provide services § Pool resources to fill gaps in market infrastructure

Knowledge § Combine capabilities to impart and skills knowledge § Combine capabilities to promote training in needed skills § Pool resources to build knowledge and skills

Access to § Combine capabilities to facilitate access financial to financial products and services products and § Pool resources to increase access to services financial products and services

1 Core competency is ‘an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity’ (Prahalad and Hamel 1990). 2 Wheeler and others 2005. 3 Mair and Seelos 2005. 4 Sullivan 2007. 5 UNDP Madagascar 2007. 6 Liew 2005. 7 Ivatury and Abrams 2005, p. 14, cited in UNDESA/UNCDF 2006, p. 86. 8 Noguera 2008. 9 Jenkins 2007. 10 USAID 2006. 11 Lartigue and Koenen-Grant 2003. 12 Business for Social Responsibility 2004. 13 Business Day 2005. 14 The Banking Association, South Africa, website (www.banking.org.za).

CHAPTER 6. COMBINE RESOURCES AND CAPABILITIES WITH OTHERS 87

7 ENGAGE IN POLICY DIALOGUE WITH GOVERNMENTS

The Philippines: Smart and the Filipino authorities are engaged in a dialogue to adapt the regulation on mobile banking for the benefit of millions of Filipinos. Photo: Smart

The story of CocoTech shows that public policy support, whatever form it takes—here research and a presidential order—can make a big difference to the success of inclusive business models (box 7.1). In other case studies, policy development, reform and support are still critically needed. In Mexico, for example, Amanco’s pilot project selling small-scale irrigation equipment to smallholder farmers has relied on the farmers’ ability to obtain public subsidies; Amanco has relied on social entrepreneurs to negotiate the subsidies on the farmers’ behalf, case by case. In Ghana, it is difficult and risky for Barclays Bank to increase the number of collectors it works with to offer microcredit services, since today’s regulations cover only Susu collectors who belong to the official Ghanaian Susu Collectors Association. Regulatory constraints are clearly within the purview of government. Although all the market constraints described in chapter 2 might be considered government responsibilities, many businesses profiled in this report have found creative ways to work around and remove the constraints through private

89 Box 7.1. Case study - CocoTech: reviving an ailing coconut industry Dr. Justino Arboleda (in the Philippines, everyone knows him as “Bo”) is the founder and president of CocoTech, a company that produces geotextiles from waste coconut husks. Bo embodies the local entrepreneur who designs from scratch and, by force of conviction, a successful inclusive business model.

After completing doctoral studies in science and agricultural engineering abroad, Bo returned to his native region, Bicol, where coconut farming is the main industry. He was struck by the worsening plight of the coconut farmers there. Regular flooding and landslides posed recurrent threats to crops and farmland. Bo also saw that the 6 billion kilograms of coconut husks produced each year in the Philippines—the world’s second largest coconut producer—were a major source of waste and greenhouse gas emissions.

As an agriculturist, Bo knew that farming and the environment go hand-in-hand. And he thought that he saw an opportunity to increase the farmers’ income, while reducing natural disaster risks, by finding a use for the coconut husks—though he did not yet know just what could be done to add value to them.

Challenges stood in the way to developing productive uses for the coconut waste. Government research and development activities focused mainly on rice and corn, with little attention to other agricultural products. The government’s failure to provide initial capital or help identify markets left farming co-operatives less than enthusiastic about Bo’s project.

Bo’s solution was to persuade the government’s principal research and development arm (after several months of efforts) to conduct a study on the husks’ possible uses. The study revealed that cocofibre

initiatives—for example, by adapting for some businesses, it is possible to work products to run on solar power, by investing around and remove market constraints only in education and training to raise the skill on a small scale. For others, it is not possible level of the workforce, by leveraging social at all. The best strategy for these businesses networks to enforce contracts and by joining is to engage in a policy dialogue to overcome with other companies in self-regulation. But the constraints they face. Empowered to use policy tools such as legislation, regulation and taxation, STRATEGIES governments exert unique authority across

Adapt Invest in Leverage Combine Engage market systems. They have the mandate to products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government use tax revenues to provide public goods, organizing the provision of collective services such as education and health care. And to Market information eliminate market constraints over the long term—so that system-wide inclusive business

Regulatory models can proliferate on a large scale— environment public policy innovation and government action are needed.

Physical But government policymakers are not infrastructure always aware of the market dynamics and

CONSTRAINTS constraints that inclusive business models

Knowledge and skills face, especially when dealing with new market actors (such as indigenous women) or new products and services (such as Access to financial coconut husk nets or mobile transactions). services In addition, complexity and uncertainty make it extremely difficult to get policy

90 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR could be made into nets, and, moreover, that it was biodegradable, helped vegetation settle in the soil to prevent soil erosion, and was much cheaper than the imported synthetic materials commonly used in public works. Bo introduced these benefits of cocofibre nets to local government units, which eventually helped to organize community partners and became Bo’s first clients.

Once CocoTech was able to produce the cocofibre nets, another challenge was to create a market for them. Although a large and unmet international demand for cocofibre nets existed, low prices and high transportation costs limited their profitability. A domestic market was needed. Thinking that a solution would be government endorsement of products from coconut husks (based on the positive results of its study), Bo wrote and advocated for a presidential memorandum, which was eventually signed, mandating the use of cocofibre products in all government infrastructure projects.

CocoTech grew from a small community-based project, with an initial capitalization of $7,000 and 5 employees in 1993, into a medium-sized enterprise with 25 employees and revenues of more than $300,000 in 2006. Members of more than 6,000 families, mostly women, were then involved in manufacturing the products. In 2005, Bo won the World Challenge competition. Bo says: ‘What was more meaningful to me was the idea that through the award, it will be much easier to promote cocofibre products throughout the world, which will help reduce poverty in coconut-producing countries because more jobs would be created.’

The Philippines: CocoTech is transforming waste coconut husks into biodegradable nets that are able to prevent soil erosion.

involvement in policymaking can be fraught with perceptions of corruption and responses right. And those responses remain rent-seeking—and, in some cases, with more right only until they stop working, or than just the perception of those negative until the market undergoes some change. externalities. Nevertheless, even at the risk Policymakers continually depend on of creating controversy, business must join in good information: specific, contextual, policy debates along with all other relevant comprehensive, real-time information that stakeholders. That is because the entrepre- suggests a decision’s likely results and neurs and managers who develop inclusive inevitable tradeoffs. Harvard economist business models are arguably the most Dani Rodrik has called for ‘strategic effective sources of information about which cooperation between the private and public policies or policy tools will help or harm. sectors, which, on the one hand, serves to The entrepreneurs and managers who elicit information on business opportunities develop inclusive business models are best and constraints and, on the other hand, placed to see the constraints their businesses generates policy initiatives in response.’1 face in the markets of the poor. The same Good policymaking, in Rodrik’s words, is entrepreneurs and managers have compelling a process of discovery.2 incentives to provide policymakers with Businesses can play a role in this detailed information on the dynamics and discovery, helping governments to identify effects of the constraints. Although businesses bottlenecks and improve the market context can sometimes act on their own to remove for inclusive business models. Business market constraints in the short term,

CHAPTER 7. ENGAGE IN POLICY DIALOGUE WITH GOVERNMENTS 91 Peru: Legislators and policymakers have a role to play in reducing market constraints. Photo: Inter-American Development Bank

improvements in policy are needed to areas. The case studies show inclusive complement, scale up and even replace such business models engaging in policy investments in the longer term. Finally, the dialogue mostly individually, through entrepreneurs and managers who develop an entrepreneur’s personal government inclusive business models can also suggest contacts, or through a company’s business specific changes that would facilitate those contacts within government—and mostly models—and they can calculate the positive on issues that are fairly specific to the effects of such changes on their customers, business model’s short-term interests. employees, suppliers and other business partners. But some have influenced policy through The Growing Inclusive Markets case demonstration effects, simply by doing studies reveal many entrepreneurs and business and succeeding at it. And some managers engaging in a policy dialogue with inclusive business models have collaborated governments, chiefly on the regulatory with others to engage governments on environment, but at times discussing other both specific and systemic constraints.

ENGAGE INDIVIDUALLY

Individually engaging government can be locations. In Madagascar, the lychee and an effective strategy for an entrepreneur or tropical fruits company Faly Export company to influence policy on an occasional advocated with local and regional authorities basis and in response to specific concerns. to involve them in road maintenance, because Often the goal is relatively limited— poor road quality complicates its product for example, to encourage government distribution. In the meantime, Faly engages to provide public goods or public services local communities in the maintenance: the the business needs to operate in particular company provides community members

92 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR with the necessary equipment and will open a lucrative new export market for remunerates them with corn seeds.3 Tiviski and other producers. Governments can also support businesses In the Democratic Republic of Congo, by gathering and providing market informa- political instability and a general absence tion, for example, by doing household surveys of laws and regulations—in the police, the or setting research priorities. And companies judiciary, the financial sector and telecom- can inform the government’s research priorities munications—have created discouraging by showing the social value that can arise risks for investors. With the Lusaka Accord from market information—through better in 1999, Joseph Kabila’s ascent to power in provision of goods and services or through 2001 and the Inter-Congolese Dialogue in new market opportunities. Dr. Justino 2002, telecommunications company Celtel Arboleda of CocoTech made a convincing identified some signs of hope and a window case to the Philippines government that for engaging the government about its using coconut husk productively could policy frameworks. Celtel’s corporate agenda significantly improve the livelihoods of coincided with the Kabila government’s poor coconut farmers (see box 7.1). On that agenda to promote peace, reunification and basis, the government decided to research post-war investment and growth. Celtel commercialization opportunities for the invested in building strong relationships with husks being discarded as waste. This research political and regulatory authorities. In 2003, resulted in the development of cocofibre a new telecommunications law was passed. nets, the production of which employs Whereas under the previous law a fixed-line dozens of families as part of CocoTech’s operator had claimed monopoly rights, the supply chain; other cocofibre companies new law created a clearer framework for state are in development. concessions and for telecommunications Sometimes individual public policy development, fostering the competition engagement by entrepreneurs and companies needed to increase access and affordability. can have far-reaching implications, changing In addition, the Post, Telephones and market structures and in some cases opening Telecommunications Regulatory Agency entirely new markets. The Mauritanian was established. camel dairy producer Tiviski has been so successful at selling its products domestically that founder Nancy Abeiderrahmane now wants to expand the business to the EU. Tiviski’s camel cheese, in particular, would fetch a high price with gourmet customers in this high-income market. Today, Tiviski cannot access the EU market, even though agricultural products from least-developed countries such as Mauritania can enter duty-free. Because there is no camel dairy industry in Europe, there are no standards and quality assurance mechanisms in place for these products. As a result of Abeiderrahmane’s requests, an EU delegation is now working to establish the necessary regulatory institutions, which

Niger: Community members collaborate to engage the government in a dialogue about issues that affect them. Photo: Adam Rogers/UNCDF

CHAPTER 7. ENGAGE IN POLICY DIALOGUE WITH GOVERNMENTS 93 ENGAGE THROUGH DEMONSTRATION EFFECTS

Demonstration effects can also influence Demonstration effects have also led policy when regulatory frameworks or public government to take action and improve goods and services are absent or inadequate. access to financial services for the poor. As Such effects depend on channels that enable part of the Angola Partnership Initiative, the government to hear about and learn Chevron, ProCredit Holding, the US from a business’s experience, whether the Agency for International Development and communication is direct or mediated by a several other donors partnered to establish third party such as a development agency. NovoBanco, a commercial bank to lend to When Électricité de France created the micro and small entrepreneurs and promote Rural Energy Services Companies in Mali, savings among poor people in Angola. the country did not regulate energy provision. In about three years of operation, it has The companies’ success, together with the issued more than $27 million in loans support of the World Bank, convinced the to approximately 5,000 micro and small government to set up new regulations. entrepreneurs in the country’s two main The new legal framework enables private cities. NovoBanco is already profitable and operators to provide electricity, either expanding in other parts of the country. through large rural concessions, where According to a recent evaluation of the the private operator has a monopoly of energy distribution, or through spontaneous Angola Partnership Initiative, NovoBanco’s candidacy, where an operator interested in ‘success has demonstrated the potential of providing electricity to a small rural area the micro and small enterprise sector in can apply for authorization from the Malian Angola and spurred the government and Agency for the Development of Household other banks to accelerate their own plans to Energy and Rural Electrification. In 2006, set up small credit funds.’4 The increased when the new legal framework became availability of small business finance will operational, Mali’s energy agency signed make it easier for Angolan businesses to more than 50 contracts with small operators. develop into qualified partners for Chevron Two or three are already operating. and other larger firms.

ENGAGE COLLABORATIVELY

In addition to the strategies of individual and others working in geographic clusters.’5 engagement and demonstration effects, The UN Department of Economic and Social firms are increasingly engaging governments Affairs and the UN Capital Development collectively, or in collaboration with other Fund add that ‘policy change is most likely stakeholder groups, on specific and systemic to occur when there is a critical mass of constraints that affect the success of inclusive institutions and interests with the same business models. According to the World concerns that are willing to act together.’6 Economic Forum, the ‘sensitive nature’ of A structure that facilitates such engagements to influence government policy co-operation is the Big Business Working is ‘particularly well suited to progress through Group of South Africa’s Business Trust, collaboration. Companies should look for which brings business leaders in an advisory opportunities to leverage their influence capacity together with government ministers alongside that of industry colleagues, those for discussions chaired by the President, with common interests in particular issues Thabo Mbeki. The structure is meant to foster

94 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure 7.1. Summary: Approaches to engaging in policy dialogue with governments

Constraints Adapt Invest in Leverage Combine Strategy 5 products and removing the strengths resources and processes market of the poor capabilities Engage in policy dialogue constraints with others with governments

Market § Engage individually information § Engage through demonstration effects Regulatory § Engage collaboratively environment

Physical infrastructure

Knowledge and skills

Access to financial products and services

relationships of trust and frank dialogue on market development and the economic issues facing the country and appropriate development of the Indian people, ICICI responses by both sides. Topics covered range complements its inclusive business models from fiscal discipline to small and medium- with a dedicated approach to informing sized enterprises to jobs and skills gaps. public policy and action. In each of its An example of an inclusive business districts, the group places one skilled alliance is the WBCSD-SNV Alliance, professional who is charged with identifying which engaged the government of Ecuador gaps in large-scale market infrastructure. To fill those gaps, the professional convenes in 2007 and created a powerful advocacy partnerships among local self-governments, network with presidential advisers to put district and state governments and economic inclusion on the social develop- other companies. ment agenda. The national implementation The Small Enterprise Assistance Fund strategy revolved around four sorts of in Colombia and Peru, together with the inclusive business models: inclusive trade US Agency for International Development fairs, a nutrition development programme, and international financial institutions, a threading development programme and engaged the governments of Colombia and models that made agricultural value chains Peru to amend regulations prohibiting public a priority. Overall the government set aside pension funds and insurance companies from credit lines totalling $87 million for four investing in private equity. Collaborating years, with the aim to create some 250,000 with pension funds and regulators, the direct and indirect jobs.7 alliance identified regulatory barriers and An example of a collaborative effort pressed for various modifications. Small driven by the private sector is the Development and medium-sized enterprises can now Strategy Group of India’s ICICI Bank. access formerly unavailable sources of Recognizing the close links between its regulated capital.8

CHAPTER 7. ENGAGE IN POLICY DIALOGUE WITH GOVERNMENTS 95 In the Philippines, public and private banks to regard prepaid card accounts as actors are innovatively collaborating to adapt accounts payable (rather than deposits).11 the regulations that now govern mobile These measures have created a more effective, banking. Questions of telecommunications lower-cost regulatory regime, increasing regulation, competition, payment systems, the ability of operators such as Smart and customer due diligence, consumer protection, Globe to expand access to the poor. deposit taking, electronic commerce, In the global arena, Visa International anti–money laundering and combating the helped convene financial services firms, financing of terrorism demand complex regulators and international donors to trade-offs between access and rule. As discuss global credit scoring and mobile The Economist reports, ‘Rather than trying to banking. Participants pooled their research, work out the best rules in advance … the expertise and voice to clarify policy and regulator is working closely with the banks regulatory needs for this rapidly evolving and operators behind the country’s two 12 m-banking schemes.’9 That allows policy- space. Mobile telecommunications makers to see what is going on and feed operators and equipment providers have a the experience into the evolving regulatory similar interest: Vodafone, Nokia and Nokia regime.10 So far, policymakers have expanded Siemens Networks are conducting research regulation and enforcement to combat and public dialogues with policymakers money laundering and the financing of about how policies and regulations could terrorism, enabled customer due diligence to enable innovative ways of providing financial be conducted by retail agents and allowed transactions through mobile telephony.

1 Rodrik 2004, p. 38. 2 Rodrik 2004, p. 38. 3 UNDP Madagascar 2007. 4 Chevron’s Angola Partnership Initiative: A Case Study. p. 9. 5 World Economic Forum 2008, p. 16. 6 United Nations Department of Economic and Social Affairs and UN Capital Development Fund 2006, p. 158. 7 World Business Council for Sustainable Development and SNV Netherlands Development Alliance 2007. 8 Hoff and Hussels 2007. 9 The Economist 2007. 10 The Economist 2007. 11 Lyman and Porteous 2008. 12 Jenkins 2007.

96 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR 8 TAKING ACTION

India: By establishing a network of Internet kiosks, a large agribusiness has taken action to provide local farmers with access to market information that can help them improve incomes. Photo: ITC Limited

The value of including in functioning markets the billions of people that are now shut out of them can hardly be overestimated. Such value will accrue to business, to the poor and to society at large. Businesses can generate profits and create the potential for long-term growth by developing new markets; innovating with new technologies, products, services and processes; expanding the labour pool; and strengthening the supply chain. Poor people can enter value chains at various points, from producing the raw materials to consuming the end products. They benefit from better access to goods and services that meet basic needs and increase productivity. They can also improve their incomes and escape poverty using their own means. Opportunities for creating mutual value exist in many sectors, from agriculture to manufacturing, from telecommunications to finance. Some inclusive business models have already achieved large-scale growth. Many more opportunities remain to be discovered.

97 Figure 8.1. Growing Inclusive Markets strategy matrix and summary STRATEGIES of solutions

Adapt Invest in Leverage Combine Engage products and removing the strengths resources and in policy processes market of the poor capabilities dialogue with constraints with others government

Leverage Ensure Engage Combine Engage Market technology private value the poor as complementary individually information individuals capabilities

As this report shows, the environments from outside find it hard to deal with in which poor people find themselves the challenges, especially when they are contribute to their lack of opportunities. accustomed to well-functioning markets Missing market information makes it in their home regions. difficult for many businesses to consider And yet, as this report has shown, there dealing with them. They face a regulatory are strategies that can work. The entrepreneurs environment where rules are not effective, featured in the Growing Inclusive Markets not supportive or not even accessible to Initiative case studies have discovered solutions them. They lack adequate infrastructure, and established successful businesses with the including roads and networks for electricity, poor. They have used their own capabilities water and telecommunications. They lack and resources to overcome constraints, often many kinds of education, skills, training and in collaboration with public, private and other knowledge. And their access to credit not-for-profit organizations—not to and insurance is restricted. These conditions mention with the poor themselves. also constrain opportunities for entrepre- The entrepreneurs in this report neurship. Local people find it difficult to exemplify what is possible. Their businesses grow their businesses. And business people contribute to achieving the Millennium

98 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Development Goals in ways that can be South Africa’s national antiretroviral magnified if others follow their example: treatment program with roughly 60% of what it now requires. Nancy Abeiderrahmane changed the face of the dairy industry in Mauritania Joshua and Winifred Kalebu have and set up a profitable business. By designed, developed and managed providing higher incomes to her 1,200 innovative, affordable community water local employees and suppliers, most of supply schemes in Uganda. Their business them nomadic herders, she is contributing earns a profit while advancing part of to Millennium Development Goal 1—to Millennium Development Goal 7—to eradicate extreme poverty and hunger— increase the proportion of people with while preserving the nomads’ way of life. sustainable access to safe drinking water. In Brazil, Antônio Luiz da Cunha In the Philippines, Napoleon Nazareno Seabra’s cosmetics company is sourcing runs a company that provides low-cost, natural ingredients from local commu- prepaid airtime cards and the option to nities, contributing to their incomes and send remittances using short message promoting Millennium Development service technology. With a network Goal 1. covering more than 99% of the population, Bindheshwar Pathak, an Indian Nazareno’s firm serves 24.2 million entrepreneur, offers clean and cheap people, reducing the ‘digital divide’ sanitation systems to 1.2 million and advancing part of Millennium households and operates 6,500 public Development Goal 8—to make available pay-per-use restroom facilities. By the benefits of new technologies. 2006, Pathak’s company had liberated The solutions these entrepreneurs have 60,000 people from lives as scavengers, found, and the inclusive business models 95% of them women and girls. The they make possible, can inspire others. There company contributes to Millennium is room for many more inclusive business Development Goal 3—to promote models. There is room for more inclusive gender equality and empower women, markets. And there is room for much greater and to part of Millennium Development value creation. In the words of Mahatma Goal 7—to reduce the proportion of Gandhi: ‘The difference between what we people without access to basic sanitation. do and what we are capable of doing would Dora Nyanja, a nurse franchisee in suffice to solve most of the world's problems.’ Kibera, Kenya, runs a Child and Family The strategy matrix and summary of Wellness clinic to provide better and solutions (figure 8.1) lists ways to apply the more affordable healthcare to slum five overarching strategies for mitigating the dwellers. In 2006 alone, Kenya’s 66 five broad constraints often faced by inclusive Child and Family Wellness shops business models. More than one solution— and clinics benefited almost 400,000 and more than one strategy—are often used low-income patients, contributing to simultaneously to overcome a constraint. Millennium Development Goal 6— This report calls businesses to action. It to combat HIV/AIDS, malaria and says: Do as the businesses in these examples other diseases. did. They found and realized a wealth of A pharmaceutical entrepreneur, opportunities for themselves and for the Stephen Saad is doing his part to poor. But the report also calls the rest of achieve Millennium Development us to action. To governments, communities Goal 6 in South Africa. Over 2001–06, and business associations—to international Saad reduced the monthly cost of organizations, nongovernmental organizations antiretroviral HIV medicines for each and other development organizations—it patient from about $428 to $13. His says: All of us can help to generate more firm is building the capacity to supply inclusive business models.

CHAPTER 8. TAKING ACTION 99 What business can do—reaching What governments can do— the poor as consumers, producers, building capacity and conditions employees and entrepreneurs for functioning markets Create capacity and space for innovation Remove constraints in the market inside the organization. For example, environment. For example, generate expose staff and management to new regulation that facilitates competitive experiences through field trips, volunteer business, reduces red tape, ensures a assignments or innovation workshops functional and inclusive financial market with local communities. Surface ideas and provides access to the legal system through competitions or incentive schemes. for the poor. Upgrade transportation, Design business development processes electricity, water and data transmission that encourage risk-taking and experi- infrastructure. Improve general and mentation, and that leverage knowledge professional education. from all functional units—particularly Establish information hubs that those that already engage with the poor. gather and share market information Develop investment tools—such as and act as brokers between local and specialized funds, ratings or investment regional businesses, nongovernmental procedures—that allow companies and organizations and other relevant commercial investors to identify and organizations and initiatives. finance inclusive business models that • Strengthen entrepreneurship capacity promise the highest return for the poor, through training, organizing, capacity for investors and for society at large. building and technical advising. Deepen community engagement to • Strengthen human capital to engage better understand the needs of poor in productive economic activity suppliers and customers, to create through effective education and innovative distribution channels, health care. to share costs and to leverage local Improve consumer awareness and knowledge and social networks. Build education to strengthen demand for links with local small and medium-sized pro-poor products. firms. Engage in dialogue with community organizations, local nongovernmental Support and finance inclusive organizations and individuals. business models through carefully calibrated incentives. Build capacity for effective collaboration, even with nontraditional partners and Strengthen government’s institutional for novel purposes. For example, hire capacity to collaborate with the staff from other sectors. Establish private sector. For example, initiate cross-sectoral secondment programmes. secondment programmes. Hire staff Engage in collaborative initiatives. from the private sector. Engage in collaborative initiatives. Enable govern- Engage in policy dialogue to improve ment entities to engage in collaborations the playing field. Provide information with the private sector and facilitate about market constraints to governments cross-sectoral partnerships. transparently and accountably, individually or collectively as part of a business Establish platforms to engage business association, policy initiative or stake- as a partner in economic development. holder dialogue. Use influence to lobby Through regional, sectoral and national for improvements in education, other development plans, engage business basic services and legal empowerment and economic development associations of the poor, as well as for safeguarding and multistakeholder groups to address human rights and environmental quality. concrete issues, such as water or waste.

100 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR What communities can do—business Provide ‘patient capital’ and other development from the ground up appropriate forms of financing to Identify opportunities that business develop inclusive business models. can seize. For example, collect and share Create innovative, impact-oriented information about the community and grant-giving models, such as challenge its members through community surveys. funds or prizes for innovations that Identify products that the community will break critical barriers to human can produce competitively. Develop development. Make the rewards large producer and marketing associations to enough to create incentives for serious share costs, aggregate production and effort and experimentation. Establish leverage bargaining power. effective and efficient ways to evaluate winning models and share learning. Develop networks of small enterprises (such as retailers) to aggregate and Facilitate cross-sectoral dialogue. strengthen distribution networks, Provide common platforms for learning, diversify inventory and link to larger exchange and decision-making. Offer corporate suppliers. capacity building and brokering services. Build transparent community organi- Work to establish a common language. zations, such as village representation or producer and consumer cooperatives, What others can do—target learning, that facilitate the dialogue between awareness and consumption to community and business. expand inclusive business practices Academia and other research What nongovernmental organizations institutions can work to improve our and other development organizations understanding of the size and structure can do—facilitating links and best of the markets where the poor live, how practice exchange inclusive business models work, what Partner with businesses to facilitate effective investments mechanisms look community engagement that is fair like and how dialogue processes between and equitable, that is sensitive to local business and government can be made values and that contributes to human accountable, legitimate and effective. development. Act as a ‘trusted broker’ in They can also identify new technologies engaging business to meet opportunities to catalyse inclusive business models. at the community level. Business and public policy schools, Act as a platform for business collabo- together with other teaching institutions, ration and best-practice dialogue. can impart knowledge about inclusive Cultivate an openness to collaborations business models and the opportunities with the private sector. they can create, motivating students Facilitate effective, legitimate and to enter the field. They can offer transparent public-private dialogue by opportunities for cross-sectoral learning providing guidance, tools and processes— and enable and encourage students to and act as a watchdog within this dialogue. pursue study projects with inclusive business models. What donors and international Business associations and partnership organizations can do—catalysing brokers can pool information about and expanding new approaches inclusive models from different sectors Raise awareness among business that are open for collaboration, help find and development practitioners about the right partner for specific projects and the opportunity of including the poor provide guidance on how to design and in business. manage collaborations.

CHAPTER 8. TAKING ACTION 101 Business associations can coordinate initiatives they can help raise awareness, collective private-sector action to foster mutual understanding and remove remove constraints. For example, barriers between stakeholders. industry associations can build joint Individuals can support pro-poor training programmes or conduct joint business models by purchasing from market research. companies who source from the poor, The media can raise awareness about or by contributing money and skills to the opportunities for business in nongovernmental organizations that development. By featuring successful facilitate inclusive business models.

The Growing Inclusive Markets Initiative is a platform to facilitate the engagement of all actors for more inclusive business models. It gathers relevant information, highlights good examples, develops practical operational strategies and creates space for dialogue. This report and the collaborative process that led to it are only first steps towards the initiative’s goals. The initiative’s online platform, www.growinginclusivemarkets.org, provides access to all the existing data and case studies gathered by the initiative. It will be continually enriched and expanded with up-to-date information and tools. In 2007, the UN Secretary-General Ban Ki-Moon issued a Call to Action on the Millennium Development Goals, urging an international effort to accelerate progress and help make 2008 a turning point in the fight against poverty. The private sector has been encouraged to join vigorously in this effort. The Growing Inclusive Markets Initiative is a complementary invitation to adopt a business approach whose scale and replicability can bridge the gap between the constraints of today and the promise of tomorrow.

Please join us in this endeavour!

102 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR i

ANNEXES

ANNEX 1. CASE STUDIES BANK

OVERVIEW

COMPANY LOCATION TYPE OF COMPANY SECTOR PAGE 1 (waste, transportation) (waste, 2 Multinational corporation Multinational company national Large SME Local organization Nonprofit and/or food Agriculture Housing Energy Health ICT services Financial and sanitation Water Textiles Tourism Other

A to Z Textiles Tanzania 107

Amanco Mexico 107

Amanz’ Abantu South Africa 108

ANZ Bank Fiji 108

Aspen Pharmacare South Africa 109

Association of Private Uganda 109 Water Operators

Barclays’ Susu Ghana 110 Collectors Initiative

Cashew Production Guinea 110

Celtel and Celplay Democratic 111 Republic of Congo

Coco Technologies Philippines 111

Construmex Mexico 112

Danone Poland 112

Denmor Garments Guyana 113

DTC Tyczyn Poland 113

Edu-Loan South Africa 114

Fair Trade Cotton Mali 114

Forus Bank Russia 115

Huatai China 115

Integrated Tamale Ghana 116 Fruit Company

Juan Valdez Colombia 116

K-REP Bank Kenya 117

Lafarge Indonesia 117

LYDEC Morocco 118

Manila Water Company Philippines 118

1. Small and medium-sized enterprises. 2. Information and communications technology

ANNEX 1. CASE STUDIES BANK 105 COMPANY LOCATION TYPE OF COMPANY SECTOR PAGE (waste, transportation) (waste, Multinational corporation Multinational company national Large SME Local organization Nonprofit and/or food Agriculture Housing Energy Health ICT services Financial and sanitation Water Textiles Tourism Other

Mibanco Peru 119

Money Express Senegal 119

M-PESA Kenya 120

Mt. Plaisir Estate Hotel Trinidad 120 and Tobago

Narayana Hrudayalaya India 121

Natura Brazil 121

Nedbank and South Africa 122 RMB/FirstRand

NTADCL India 122

PEC Luban Poland 123

Pésinet Mali and 123 Senegal

Petstar Mexico 124

Procter & Gamble Cross-regions 124

Rajawali Indonesia 125

RiteMed Philippines 125

Rural Electrification Mali 126

Sadia Brazil 126

Sanofi-aventis Sub-Saharan 127 Africa

SEKEM Egypt 127

SIWA Egypt 128

Smart Communications Philippines 128

Sulabh India 129

The HealthStore Kenya 129 Foundation

Tiviski Dairy Mauritania 130

Tsinghua Tongfang (THTF) China 130

VidaGás Mozambique 131

Votorantim Celulose Brazil 131 e Papel

106 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR A to Z Textiles Sub-Saharan Africa > Tanzania

Type of company Local small or medium-sized enterprise

Sector Health / Textile Malaria, transmitted through mosquito bites, kills a million people worldwide each year. In 2004, A to Z Textile Mills of Tanzania became the sole Author(s) African producer of long-lasting insecticide treated bed nets, able to kill Winifred Karugu mosquitoes on contact for five years without retreatment and resistant to Triza Mwendwa tears. The venture’s success relies on a broad public-private partnership. Sumitomo, a Japanese company, transfers technology and chemicals to Millennium Development A to Z through a loan from Acumen Fund. Exxon Mobil sells resin for Goals addressed the nets to A to Z and donates funds to UNICEF to buy the treated nets 1 for the most vulnerable children. UNICEF and the Global Fund to Fight AIDS, Tuberculosis and Malaria act as buyers of last resort, guaranteeing to buy all the nets that do not clear normal market channels. A to Z 34 makes nets available through direct and mobile marketing. The government promotes via social marketing through a national voucher scheme that brings subsidized treated nets to pregnant mothers and children 6 under five. In addition to the impact on public health, A to Z employs about 3,400 low-skilled people, 90% of them women.

Amanco Latin America and the Caribbean > Mexico

Type of company Large national company

Sector Agriculture

Author(s) Loretta Serrano For decades, small farmers in Latin America have faced a grim outlook: low productivity and inefficiency. That was the background for the decision of Amanco, a subsidiary of the conglomerate GrupoNueva, to Millennium Development develop a hybrid value chain model for serving low-income markets. Goals addressed As part of that plan, the company shifted from selling water conveyance 1 supplies to offering integrated irrigation solutions, priced per hectare of land. The solutions included services to increase farm productivity and to maximize water efficiency. The company partnered with unconventional civil society organizations—closer to low-income clients—and with others providing microcredit and access to alternative channels for commercialization. Better irrigation methods raised productivity for 7 Amanco customers up to 22%, cut labour costs 33% and brought significant water efficiencies.

ANNEX 1. CASE STUDIES BANK 107 Amanz’ Abantu Sub-Saharan Africa > South Africa

Type of company Local small or medium-sized enterprise

Sector Water / Sanitation Amanz’ abantu means ‘water for the people’ in Xhosa, Ndebele and Zulu. Amanz’ Abantu Services, Ltd., established as a private South African Author(s) company in 1997, aimed to provide water supply and sanitation for Courtenay Sprague peri-urban and rural communities in the Eastern Cape, where a quarter of the population lacked potable water. The company pipes water meeting international quality standards to sites where individuals can access Millennium Development standpipes using smartcard technology. Before the arrival of Amanz’ Goals addressed Abantu, villagers—mainly rural women—had to walk up to several hours to obtain water from the nearest river. And they were still vulnerable to waterborne diseases. Bringing a safe water supply within 200 metres of homes transformed the lives of rural residents, equipping villagers with 4 5 skills in building and construction and making them employable in a country with 25% unemployment. The case details the contentious reception for private-sector involvement in water provision and how the 6 8 company overcame the obstacles to address a social problem and earn a profit—$67,000 in 2006.

ANZ Bank Asia and the Pacific > Fiji

Type of company Multinational corporation

Sector Financial Services

Author(s)

In Fiji, close to 340,000 people living in rural villages and settlements do not have access to banking services. UNDP and ANZ Bank partnered to Millennium Development devise viable and innovative commercial banking services, supported by a Goals addressed financial literacy training programme. The investment comprises a fleet of 1 6 mobile banks that travel on a regular schedule to 150 designated rural villages and settlements. The ability to change the mandated proof of identify required to open a bank account enabled ANZ Bank to offer 3 products such as loans and savings accounts to those communities who lacked official documentation. In the first 5 months of operation, 17,000 women, men and school children are beginning to save regularly and over 1,500 villagers have acquired valuable money management skills. The bank is currently expanding its operations to reach 140,000 clients.

108 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Aspen Pharmacare Sub-Saharan Africa > South Africa

Type of company Large national company

Sector Health

Author(s) Courtenay Sprague Stu Woolman The need for antiretroviral treatment in South Africa is acute. Without significant changes, current projections indicate that 3.5 million South Millennium Development Africans will die of AIDS-related infections by 2010. In 1997, Stephen Goals addressed Saad sold his shares in the Covan Zurich pharmaceutical company and, along with two others, founded Aspen Pharmacare with $7 million. Its goal: to build a major pharmaceutical manufacturer capable of supplying the South African market with brand name, generic and over-the-counter 4 5 medicines at affordable prices. Aspen is now the largest producer of tablets and capsules in Africa, recording a net profit of $75 million in 2005. The case describes how Aspen’s business model and innovations have 6 responded to a challenging environment, complicated by humanitarian, governmental and legal demands.

Association of Private Water Operators Sub-Saharan Africa > Uganda

Type of company Local small or medium-sized enterprises

Sector Water Of Uganda’s 21 million people, more than 2 million live in small towns with poor water supplies. Most people in these towns are low income, Author(s) and their lack of water aggravates poverty and encourages diseases. Winifred N. Karugu Initially, reforms in water and sanitation came through government- Diane Nduta Kanyagia sponsored boreholes in villages across the country. In 2003, however, Uganda developed a new model to address the water needs of low-income Millennium Development residents in small towns, based on a private-public partnership among Goals addressed government, development partners, local councils and private water operators. The government finds sites, drills boreholes, facilitates community land purchase and subsidizes installments. The private operator distributes water, checks safety and captures the profits. The community water board 34 owns assets and sets tariffs and policies. The model brought access to water to 490,000 people in 57 small towns through such innovative systems as coin-operated water kiosks. In 2006 there were 18,944 6 8 connections, with annual turnover of 2 billion Ugandan shillings ($1.2 million) a year. The operators also employ more than 800 people.

ANNEX 1. CASE STUDIES BANK 109 Barclays’ Susu Collectors Initiative Sub-Saharan Africa > Ghana

Type of company Multinational corporation

Sector Financial services

Author(s) Robert Darko Osei Susu collection, practiced for more three centuries in Africa, is an informal arrangement for mobilizing savings deposits from clients. Operators collect a predetermined installment of money from their client, Millennium Development daily or weekly. With about 4,000 active Susu collectors in Ghana and Goals addressed each serving 200–850 clients a day, Susu collection has become an 1 established (albeit informal) system that meets an important need. In November 2005 Barclays Bank Ghana embarked on an initiative at the intersection of traditional banking and modern finance, leveraging Susu collection to extend microfinance to some of Ghana’s poorest people—the small trader at the market or the microentrepreneur selling from roadside stalls. The case looks at how the Barclays Ghana initiative 8 augments the Susu collection scheme and the project’s impact on advancing Barclay’s corporate objectives.

Cashew Production Sub-Saharan Africa > Guinea

Type of company Local small or Guinea grows about 5,000 tons of raw cashew nuts a year. Meanwhile, medium-sized enterprise its much smaller neighbour Guinea-Bissau, with similar soil and climate, produces 80,000 tons. Encouraged by the growing consumer demand for Sector cashews, Guinea has begun to focus on expanding cashew production— Agriculture a good candidate for expansion, with 80% of Guineans dependent upon subsistence agriculture for their livelihoods. Guinea’s climatic conditions, Author(s) Mamadou Gaye fertile soil and long rainy season are all favourable for growing large, high- Ousmane Moreau quality cashews. International agencies have lent technical and financial support to help Guinean producers enhance their competitiveness in Millennium Development world markets. Goals addressed Over the last three years, the Global Development Alliance Partnership, 1 encompassing several Guinean cashew cooperatives, the government, the US Agency for International Development and Kraft Foods, has helped Guinean farmers produce and sell cashews. The goal is to reduce poverty and secure a better economic future for the country. The partners have collaborated to provide technical support to community-based organizations. The case describes the ambitious plans: 1,600 hectares of old cashew 7 8 plantations rehabilitated, 12,000 hectares of new plantations made ready, improved seeds supplied and 1,600 farmers’ associations trained.

110 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Celtel and Celplay Sub-Saharan Africa > Democratic Republic of Congo

Type of company Multinational corporation

Sector Information and communications technology / Financial services

Author(s) Juana de Catheu Celtel International—the leading pan-African mobile communications group, with operations in 15 countries—entered the Democratic Republic of Congo in 2000, when the civil war was still raging. It faced a market Millennium Development with widespread insecurity, poverty, depleted human capacity and political Goals addressed and regulatory uncertainty. There was little or no infrastructure and no 1 banking network. The potential customer base seemed very small, with few ways to reach out to them. Despite those obstacles, Celtel has gained more than 2 million customers in the country, allowing communities previously isolated by war and poor infrastructure to exchange information. Celtel also established Celpay—previously part of Celtel and now owned by FirstRand Banking Group—as a mobile banking system to compensate 8 for the lack of a national banking network. The case outlines each obstacle and details how the company addressed them.

Coco Technologies Asia and the Pacific > Philippines

Type of company Local small or medium-sized enterprise

Sector Agriculture

Author(s) Elvie Grace Ganchero In the Philippines, the coconut tree is called the tree of life because of its Perla Manapol wide-ranging uses. The traditional focus on dried coconut flesh and oil, however, makes farmers vulnerable to market fluctuations. This has made Millennium Development them disproportionately poor: coconut farmers make up 4% of the Goals addressed Philippines’ 89 million people but 20% of its poor. 1 Coco Technologies (CocoTech), a privately held enterprise, has pioneered bio-engineering applications of cocofibre nets made from waste coconut husks since 1993. Today, its collaborative business model involves 3 more than 6,000 families in weaving and manufacturing nets for slope stabilization and erosion control. CocoTech provides supplementary income to coconut farmers, livelihood opportunities for traditionally 7 nonproductive family members and a low-cost, environment-friendly solution to its clients.

ANNEX 1. CASE STUDIES BANK 111 Construmex Latin America and the Caribbean > Mexico

Type of company Developing country multinational corporation

Sector Construction / Housing Construmex, an initiative of Mexican construction and building giant Author(s) CEMEX, was launched after the company’s success with Patrimonio Hoy, Loretta Serrano a socially minded business initiative targeted at low-income consumers. Since its inception in 2001, Construmex has helped more than 14,000 Mexican migrants in the United States build, buy or improve a house in Millennium Development Mexico—for themselves or their families. By becoming an intermediary Goals addressed between Mexican migrants in the United States and their designated 1 contacts or beneficiaries in Mexico, Construmex increases the efficiency and effectiveness of housing investments. The case examines Construmex’s challenges serving low-income markets and the innovations required to solve them, including the variety of partnerships necessary for executing a commercial transaction initiated in one country and closed in another. From 2002 to 2006, Construmex 8 generated $12.2 million from construction material sales. Since late 2005, 200 houses have been sold, and 23% of Construmex clients are women.

Danone Europe and the CIS > Poland

Type of company Multinational corporation

Three years ago Danone Poland—established in 1992, part of Groupe Sector Agriculture / Food Danone, a leader in the global food industry—developed a breakfast product that has high nutritional value for children and is affordable for Author(s) low-income consumers. A milk porridge product based on semolina and Boleslaw Rok milk, Milk Start is enriched with vitamins and minerals. To make the initiative financially sustainable, Danone knew that the products had to be profitable, or at least cover the costs of product development, Millennium Development manufacturing and distribution. The project team established partnerships Goals addressed with a state child health and nutrition organization, Poland’s largest manufacturer of instant products and the country’s largest food retailer. The partners committed to offering the lowest price possible with the highest nutritional quality. The collaboration brought many innovations, 4 including economical packaging for single-serve sachets to drive down production costs and increase accessibility. Milk Start launched in September 2006 and reached sales of more than 1.5 million sachets by 8 the end of 2006, including about 33,000 households with children under the age of 15.

112 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Denmor Garments Latin America and the Caribbean > Guyana

Type of company Local small or medium-sized enterprise

Sector Textile

Author(s) Melanie Richards

Since July 1997, Denmor Garments, Inc.—a privately owned garment Millennium Development manufacturer in Coldingen, Guyana—has grown from 250 employees Goals addressed to more than 1,000, 98% of them women from poor rural communities. 1 Aside from employment, Denmor also provides training and empowerment to lift the women out of poverty. With innovative solutions, Denmor has overcome many challenges to employing women from poor rural 3 Guyanese communities, especially illiteracy and transportation difficulties. Today, the organization manufactures garments for top global brand names and has won a prestigious industry-wide award for quality standards. The case details the company history, interwoven with the inspirational personal story of its founder, Dennis Morgan.

DTC Tyczyn Europe and the CIS > Poland

Type of company Local small or medium-sized enterprise

Sector Information and communications technology

Author(s) Boleslaw Rok Well-developed telecommunications infrastructure is critical for local economic development. In a rural valley region close to the Ukranian Millennium Development border, District Telephone Cooperative Tyczyn began by uniting village Goals addressed telephone committees and local governments. One of the first independent operators in Poland, Tyczyn broke the state monopoly on providing telecommunications services. The enterprise is a cooperative that offers a variety of services—better and cheaper than those of competitors—to its mostly village-based clients. The case shows the challenges Tyczyn overcame in helping establish a more inclusive society in one of Central and Eastern Europe’s poorest regions. Information and communications 8 technology became a vehicle for changing living conditions for the poor and establishing new social infrastructure.

ANNEX 1. CASE STUDIES BANK 113 Edu-Loan Sub-Saharan Africa > South Africa

Type of company Local small or medium-sized enterprise

Sector Financial services For decades during apartheid, South Africa’s public authorities neglected the education of the vast majority of the country’s people—now referred Author(s) to as the historically disadvantaged. In the new South African economy, Farid Baddache there are big needs for skilled and educated workers to sustain development. But post-secondary education is not free, and most historically disadvantaged people do not have money to pay. Nor do they qualify for traditional Millennium Development modes of financing. Goals addressed Edu-Loan, a for-profit company focused exclusively on loans for post-secondary education, offers simple repayment options—at affordable rates—to historically disadvantaged applicants interested in advancing their skills. Since its inception in 1996, Edu-Loan has financed close to 400,000 students with loans totalling more than $140 million. Edu-Loan’s commercial success mirrors its social impact: the company offers share- holders a return on capital employed of 30%. The case examines how two 8 social entrepreneurs saw an opportunity for a profitable business venture in a niche market that would also have an impact on human development.

Fair Trade Cotton Sub-Saharan Africa > Mali

Type of company Local small or medium-sized enterprise Cotton is one of the world’s oldest commercial crops, harvested in Africa for more than 5,000 years. Today, it is the main source of income for Sector Agriculture 20 million people and accounts for up to 60% of national export earnings in West and Central Africa. Since 1999, however, African producers have Author(s) suffered from successive price falls—with no guarantee for farmers that Mamadou Gaye the selling price will allow them to earn a return on investment and recoup the production costs. African producers are disproportionately vulnerable, often working with old-fashioned tools on family plots but Millennium Development competing with highly subsidized producers from rich countries. African Goals addressed cotton farmers thus often see no benefits from international trade. 12 This case discusses fair-trade cotton initiatives that help poor Malian farmers sustain their production and earn meaningful revenues. The work of the Fair-trade Labeling Organization (an international fair-trade organization), its French member Max Havelaar France, and European clothing retailers such as France’s Armor-Lux highlights the value of fair trade for both producers and end-consumers. Thanks to a 7 8 guaranteed minimum price implemented as part of the fair-trade process, Mali’s producers increased their income by 70% during the 2005/06 harvest.

114 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Forus Bank Europe and the CIS > Russia

Type of company Local small or medium-sized enterprise

Sector Financial services

Author(s) Boleslaw Rok The Fund for Support of Microentrepreneurship (FORA), created in 2000 by the microfinance-support organization Opportunity International, sought to eliminate poverty in the Russian Federation by giving economically Millennium Development active people access to small loans to support their businesses. Providing Goals addressed financial services to people excluded from commercial banks, FORA 1 created opportunities for the poor, especially women, to become active in the economy through entrepreneurship, income generation and social empowerment. As businesses grew, FORA, together with Opportunity 3 International and other partners, established FORUS Bank in 2005 to access commercial capital and reach more clients. The case shows the challenges in transitioning from a not-for-profit organization to a 8 commercial microfinance bank—some specific to Russia, others with worldwide relevance.

Huatai Asia and the Pacific > China

Type of company Large national company

Sector Other

Author(s) Donghui Shi

Millennium Development Goals addressed In 2000, Huatai Paper Company, Ltd., the biggest newsprint manufacturer in China, launched a new strategy to substitute wood pulp for straw pulp. The key was mobilizing local farmers to plant fast-growing trees. Farmers get support from Huatai and the local government through technology, education and irrigation. About 6,000 households have participated, planting 40,000 hectares of fast-growing tress and generating a significant new source of income. Meanwhile, Huatai has grown its newsprint 7 8 business while decreasing its environmental impact and minimizing the risk from volatile import prices for pulp.

ANNEX 1. CASE STUDIES BANK 115 Integrated Tamale Fruit Company Sub-Saharan Africa > Ghana

Type of company Local small or medium-sized enterprise The Integrated Tamale Fruit Company—operating in the Savelugu- Nanton District in Ghana’s Northern Region, an area of widespread Sector Agriculture poverty—cultivates certified organic mangoes for local and export markets. To boost its power in the export market with higher production volumes, Author(s) the company established a scalable business model that includes local Robert Darko Osei farmers. Instead of acquiring a very large piece of land—physically and financially impractical—the company produces high volumes through an outgrower scheme, which started in 2001 and today includes 1,300 Millennium Development outgrower farmers. Each has a farm of about an acre, with 100 mango Goals addressed trees that supplement the nucleus farm of 160 acres. The company 1 provides an interest-free loan to the outgrowers through farm inputs and technical services, and farmers start paying for the loan from selling mangos only after the trees yield fruit. This arrangement allows the company to reliably source a large volume of quality organic mangoes, and the farmers can enter mango production with long-term income prospects. The nucleus farm’s profits are on track to reach $1 million a 7 8 year by 2010. The case examines the key challenges of the outgrower scheme and its implications for the company’s business.

Juan Valdez Latin America and the Caribbean > Colombia

Type of company Large national company Coffee is a way of life for the more than 566,000 Colombian farmers associated with the National Federation of Coffee Growers of Colombia (NFC). About 95% of NFC coffee growers are small-scale, with coffee Sector plantations of less than 5 hectares. An estimated 2 million Colombians Agriculture depend directly on coffee production. For decades the coffee market has confronted crises from international price instability, with significant Author(s) Luis Felipe Avella Villegas repercussions on the quality of life for small producers and their families. Loretta Serrano The Juan Valdez character—created in 1959 to position Colombian coffee globally, particularly in the United States—was relaunched in 2002 Millennium Development with the inauguration of the Juan Valdez Coffee Shops, part of an NFC Goals addressed initiative to increase coffee producers’ profits by incorporating direct sales 1 into its commercial model. In 2006, the company operated 57 coffee shops in Colombia, the United States and Spain, with sales reaching $20 million. The case explores Juan Valdez Coffee Shops’ inclusive and sustainable business model—a fair trade value chain linking communities of producers, businesses, consumers and catalyst organizations. It analyses the main 8 challenges, innovations and results, along with the potential adaptations required to scale up and consolidate the business.

116 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR K-REP Bank Sub-Saharan Africa > Kenya

Type of company Local small or medium-sized enterprise

Sector Financial services

Author(s) Winifred N. Karugu Diane Nduta Kanyagia

K-REP Bank, which started operations in 1999, is among the more Millennium Development successful microfinance institutions. It offers diverse products and Goals addressed services, including microcredit facilities to low-income people, individual 1 loans, wholesale loans to microfinance providers, deposit facilities, letters of credit and bank guarantees. The microcredit loans, based on the Grameen Bank’s group-lending model, fall into three categories. A group 3 progresses through the categories, towards readiness for commercial bank loans. K-REP disbursed 69,000 loans in 2005, reporting healthy financial performance and a return on equity between 4% and 12%. The case 8 highlights the challenges of this model and K-REP Bank’s innovations to respond. It also spotlights some typical K-REP customers.

Lafarge Asia and the Pacific > Indonesia

Type of company Multinational corporation

Sector Construction / Housing

Author(s) Farid Baddache

Lafarge, a world leader in building and construction materials, employs Millennium Development 80,000 people in 76 countries and posted sales of over $18 billion in Goals addressed 2005. Lafarge has long been present in Indonesia. But the December 2004 tsunami devastated the Banda Aceh region, where Lafarge operates a cement plant. Cement, a low value-added commodity, is profitable only if sold close to where it is extracted—and thus inseparable from local socioeconomic realities. When 12,000 people were killed in the community around Lafarge’s plant, the company lost 193 of 635 employees. The plant appeared ruined. This case analyses the innovations needed for the firm to 8 restructure operations while helping rebuild the community. It is a story about pursuing short- and long-term strategic business interests.

ANNEX 1. CASE STUDIES BANK 117 LYDEC Arab States > Morocco

Type of company Multinational corporation

Sector Energy, water and sanitation

Author(s) Tarek Hatem

Millennium Development In 1997, the Moroccan authorities picked LYDEC, a private-sector Goals addressed consortium managed as a subsidiary of SUEZ Environment, to manage 12 Casablanca’s electricity, water and sewage networks under the National Initiative for Human Development. The goal of the 30-year management contract was to provide access to essential services—electricity, water and 3 sanitation—to the residents of Casablanca, including the poor living in shantytowns or illegal settlements. LYDEC has significantly increased the number of people with access to electricity and water services by partnering 6 7 8 with the government and working closely with local users through a network of street representatives.

Manila Water Company Asia and the Pacific > Philippines

Type of company Developing country multinational corporation

Sector Water / Sanitation

Author(s) Jane Comeault

Millennium Development Since beginning operations in 1997, Manila Water Company Goals addressed Incorporated—a water and wastewater concessionaire in the east service zone of Metro Manila—has connected more than 140,000 low-income households to the piped water system and provided access to clean water to more than 860,000 low-income individuals. Meanwhile, Manila Water has improved water and wastewater services throughout its service area, boosting coverage, reliability, customer service and water quality. The case examines the special challenges and opportunities of delivering water and 6 7 wastewater services to the urban poor and Manila Water’s innovative approaches to expanding coverage.

118 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Mibanco Latin America and the Caribbean > Peru

Type of company Local small or medium-sized enterprise

Sector Financial services

Author(s) Pedro Franco Mibanco, a microfinance institution with 74 offices nationwide, was the first commercial bank in Peru and the second in Latin America focused on providing financial services to lower-income households and their Millennium Development micro and small enterprises. Since launching operations in 1998, Mibanco Goals addressed has loaned more than $1.6 billion, in amounts ranging from $100 to 1 $1,500. Starting from a base in Lima, Mibanco spread nationwide, including to rural areas. Responding to growing competition in the lower-income market, Mibanco continues to offer new credit products. 3 The company reports a healthy bottom line, with a 23.2% return on equity and earnings of more than $5 million in 2002. The case examines the challenges Mibanco faced in offering credit to people who had never had access to the formal banking system—and the innovations contributing to success.

Money Express Sub-Saharan Africa > Senegal

Type of company Local small or medium-sized enterprise

The Chaka Group, created in 1994 by the Senegalese entrepreneur Sector Financial services Meissa Deguene Ngom, is comprised of three units: Chaka Computer, Call Me and Money Express. The case focuses on Money Express and its Author(s) benefits for the poor. From the outset, Money Express’s goal was to be Mamadou Gaye the market leader in transfer and remittance services for West African Ousmane Moreau immigrants in Europe and the United States. To send money from abroad, Money Express clients need only a Senegalese or West African Millennium Development passport. The company, spread through rural and urban areas, works in Goals addressed partnership with networks of smaller banks in West African villages. 1 Money Express helps recipients get their money, with agents sometimes going door-to-door to give remittances to elderly people who cannot easily leave their houses. For the many clients who lack the identification necessary for formal banks, this is a worthy value proposition. Many banks also lack the infrastructure to deliver funds in rural areas. The case describes how Money Express rapidly expanded across West Africa because 8 of its low-cost business model, knowledge of the African market and emphasis on customer service and on developing and training employees.

ANNEX 1. CASE STUDIES BANK 119 M-PESA Sub-Saharan Africa > Kenya

Type of company Developing country multinational corporation

Sector Financial services / Information and communications technology

Author(s) Winifred N. Karugu Triza Mwendwa Kenya has fewer than 2 million bank accounts serving 32 million Millennium Development people. To bridge the gap, Safaricom Kenya, one of two mobile service Goals addressed providers in Kenya, developed a technological solution in partnership with Vodafone. The result was M-PESA, an electronic money transfer product to make financial transactions faster, cheaper and more secure. M-PESA allows individuals and businesses to transfer money through the mobile phone’s short message service. Cash withdrawal and deposit are available at registered retail outlets to pay for goods and services. After the successful launch in 2005, Safaricom plans to recruit more financial 8 institutions and retail outlets into the system and to expand it to other developing countries.

Mt. Plaisir Estate Hotel Latin America and the Caribbean > Trinidad and Tobago

Type of company Local small or medium-sized enterprise

Sector Ecotourism

Author(s) Melanie Richards

Millennium Development Mt. Plaisir Estate Hotel is an idyllic retreat for the eco-tourist, the first Goals addressed of its kind in Grand Rivière on Trinidad’s North Coast. In its 14 years 1 of operation, the hotel has helped transform a poor rural village into a vibrant, self-sustaining community. Meanwhile, the hotel enjoyed steadily increasing revenues from 1995–2001, earning $238,000 by 2001. The case outlines the background of the organization and the challenges and opportunities it faced in building a viable business while developing, empowering and training a community to become self-sufficient and 7 sustainable. It also highlights the inspiring human narrative of the founder, Piero Guerrini.

120 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Narayana Hrudayalaya Asia and the Pacific > India

Type of company Local small or medium-sized enterprise

Sector Health

Author(s) Prabakar Kothandaraman Sunita Mookerjee

Large sections of Indian society, unable to pay health care costs, are Millennium Development denied even the most basic health care services. Health insurance, Goals addressed especially for the poor, is virtually nonexistent. In 2001, Devi Shetty 1 founded Narayana Hrudayalaya, a cardiac hospital on the outskirts of Bengaluru. Its mission, driven by Shetty’s belief that a country’s poor people need to become healthy if the country is to become wealthy, is to deliver state-of-the-art cardiac care to poor people—leveraging technology, streamlining caregiving and extending innovative health insurance to the poor. The hospital never denies patients unable to pay. Even so, its 6 8 profits are an impressive 20% before interest depreciation and tax, higher than the leading comparable traditional hospital.

Natura Latin America and the Caribbean > Brazil

Type of company Large national company

Sector Agriculture In 2000 Natura, a Brazilian cosmetics company, launched a strategy to use raw material extracted from nature as a platform for its products. To Author(s) scale local production and guarantee sustainable extraction, the company Cláudio Boechat built a new business model, involving small communities, nongovernmental Roberta Mokrejs Paro organizations and governments in promoting sustainable local development. All the parties agreed, transparently, on a reasonable profit margin: Millennium Development 15%–30%. Natura leveraged the programme to differentiate its brand Goals addressed in the marketplace. Natura’s philosophy is to maximize the benefits simultaneously for nature, for communities and for the company. As a part of Natura’s commitment to social responsibility, it established supplier relationships with rural communities that extract raw material from Brazilian vegetal biodiversity. In Pará, it contacted three communities—Campo Limpo, Boa Vista and Cotijuba—in 2003 to produce priprioca, a grass whose 7 8 roots yield a rare, delicate fragrance. Business has grown so much that in 2006 Natura built a new industrial plant to produce soap in the region.

ANNEX 1. CASE STUDIES BANK 121 Nedbank and RMB/FirstRand Sub-Saharan Africa > South Africa

Type of company Large national company

After decades of violence, segregation and inequality during apartheid, Sector Financial services South Africa has made significant efforts to bring equality and stability through structural shifts in its economy. Two South African banks, Author(s) Rand Merchant Bank and Nedbank, are developing innovative financial Farid Baddache products targeted at South Africa’s low-income housing market. Both projects, planned for public rollout in 2007, are in line with the Voluntary Financial Services Charter, a black economic empowerment strategy Millennium Development designed by the private sector with government support. Rand Merchant Goals addressed Bank finances affordable housing programmes that favour social diversity in township areas. Nedbank makes mortgages available to low-income people. They are pursuing a market previously left out— people too poor to qualify for traditional housing loans but above the government’s qualification for receiving public housing support. The case examines the development of the two financial products, including the barriers encountered and the innovations to overcome them, along with the 8 expected outcomes, the lessons learned and future opportunities for growth in the low-income housing market.

New Tirupur Area Development Corp. Ltd. (NTADCL) Asia and the Pacific > India

Type of company Large national company

Sector Water / Sanitation

Author(s) In Tirupur, a small town in southwestern Tamil Nadu, effluent discharge Prabakar Kothandaraman from the textile industry has polluted the ground water. Water is now K. Kumar scarce for both industry and local inhabitants. Realizing the old state- funded water schemes were not enough to meet burgeoning demand, the Millennium Development government of Tamil Nadu looked for private partnerships to help meet Goals addressed the investment, engineering and operational challenges. With the support 1 of experienced financing, engineering, procurement and construction companies, the government formed a special purpose vehicle, The New Tirupur Area Development Corporation, Ltd. The new company then signed a 30-year concession agreement with the government, with an expected return on investment of 20%. The case highlights the company’s sophisticated multistakeholder deal structure and details its innovative 6 7 tariff layering, using industrial revenues to cross-subsidize costs for low-income domestic consumers.

122 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR PEC Luban Europe and the CIS > Poland

Type of company Local small or medium-sized enterprise

Sector Energy

Author(s) PEC Luban, a company providing district heating in Luban, Poland, Boleslaw Rok began using straw for heat generation in the late 1990s. This brought significant reductions in harmful emissions from burning traditional fuels, mostly coal. Using straw—a locally produced, renewable source of Millennium Development biomass energy—also spurred demand from local farmers. Biomass Goals addressed energy, relatively labour intensive, generates at least 20 times more local employment than any other form of energy. The competitive results are also encouraging: in 2004/05 the price of heat for PEC Luban consumers was around 5% less than the average at other district heating companies using only coal. The case details the changes in management and cost- analysis methods needed as a company transitions to more sustainable and inclusive operations, offering an example of overcoming technical 7 8 challenges to meet energy needs sustainably while supporting the local community.

Pésinet Sub-Saharan Africa > Mali and Senegal

Type of company Nonprofit organization

Sector Health / Information and communications technology

Author(s) Mamadou Gaye Pésinet, devised in 2002 by Brussels-based Afrique Initiatives, is an early warning method for monitoring the health conditions of children from low-income families. Its concept is simple: mothers subscribe to Pésinet’s Millennium Development services for a nominal fee, and in return a local Pésinet representative Goals addressed weighs her children twice a week. Results are communicated through information and communications technologies to a local doctor, who reviews the weight chart and requests that the mother and child visit if the weight readings are anomalously low and medical treatment might be 4 required. Originally implemented in Saint Louis, Senegal, the project failed to achieve the financial sustainability needed. But the lessons learned and its innovative solutions—including strategic partnerships and 6 8 technical and financial improvements—helped Pésinet successfully relaunch in Mali in 2007, benefiting hundreds of children.

ANNEX 1. CASE STUDIES BANK 123 Petstar Latin America and the Caribbean > Mexico

Type of company Large national company

Sector Waste In Toluca, Mexico, Mexican environmental services firm Promotora Ambiental's Petstar unit will construct and operate a bottle-to-bottle Author(s) plastic recycling facility that will convert post-consumer polyethylene terephthalate (PET) bottles into food-grade using a technology so far mainly used in developed countries. The discarded PET bottles that the plant recycles will reduce the volume of municipal solid waste generated Millennium Development in Mexico and the output will reduce the consumption of virgin PET by Goals addressed bottle manufacturers. The plant is expected to increase Petstar's sales by 1 50%, generate 63 local direct jobs and provide an income to about 25,000 people along the supply chain. At waste disposal sites, where individual garbage sorting and recycling workers labour in poor working conditions, 3 Petstar is developing a programmatic social engagement plan directly targeted at addressing this systemic issue, thereby reducing the incidence of harmful informal child labour within its supply chain. By converting 7 waste drinking bottles into a usable, valuable manufacturing input, the project will support improved waste management in Mexico.

Procter & Gamble Cross-regions

Type of company Multinational corporation

Sector Water According to the World Health Organization, safe drinking water is one Author(s) of the world's greatest needs. More than 1 billion people lack safe water, Farid Baddache and an estimated 1.8 million children die every year because of diarrhoeal diseases linked to contaminated water. Procter & Gamble Health Sciences Institute, in collaboration with the US Centers for Disease Control and Millennium Development Prevention, developed an affordable, easy-to-use home water purification Goals addressed product, Purifier of Water (PUR). Launched in 2000, this innovative powder, sold in individual sachets, reduces pathogenic bacteria. The result: drinking water that meets World Health Organization standards. After vain efforts to turn this innovation into a for-profit venture in 4 various developing countries, P&G is now promoting it as a corporate social responsibility initiative. By 2007 it had sold, at cost, 57 million sachets to humanitarian organizations, with local entrepreneurs distributing 6 them for profit. The initiative also brings P&G a strong public profile and experience that will help it sell products for profit in high-income markets.

124 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Rajawali Express Taxi Asia and the Pacific > Indonesia

Type of company Local small or medium-sized enterprise

Sector Transportation The 1997 Asian financial crisis created a job vacuum in Indonesia, Author(s) with companies forced to lay off 1.4 million workers. A decade later, Elvie Grace A. Ganchero unemployment rates continue to rise and poverty defines the context Chrysanti Hasibuan-Sedyono for Indonesia’s economy, social relations and security. Express Taxi, a subsidiary of the diversified conglomerate Rajawali and the second-largest Millennium Development taxi operator in Indonesia, launched a new Taxicab Ownership Scheme Goals addressed where drivers lease their taxis and build toward ownership. Express Taxi 1 uses the company reputation and assets to back the loans. The drivers gain by earning more take-home income. The company profits from drivers who treat vehicles responsibly and bring more stable cash flows. The community benefits from drivers who drive more safely with their own cars, with added support from company-provided safety courses. The case highlights how a company can help fight poverty by forging a 8 mutually beneficial partnership with employees from poor urban and rural communities.

RiteMed (UniLab) Asia and the Pacific > Philippines

Type of company Developing country multinational corporation

Sector Health

Author(s) Elvie Grace A. Ganchero The market price of medicines in the Philippines is among the highest Cristina V. Pavia in the world—40%–70% more than in neighbouring countries, according to the Philippine Department of Health. Some drugs cost 10 times more Millennium Development in the Philippines than in neighbouring countries. In business since 1945, Goals addressed United Laboratories, Inc., (UniLab) is the oldest pharmaceutical company in the Philippines and still one of the largest. Seizing an opportunity to support the government’s campaign to make lower price drugs available, UniLab set up RiteMed in 2002, a subsidiary with the mission of marketing and distributing quality, generic medicines to the poor. The company sells generic products for 20%–75% less than their branded counterparts cost, meeting revenue targets of $20 million within five years—profitably. The 6 8 case explores the social, legal and strategic tensions that accompanied the initiative and solutions that address them.

ANNEX 1. CASE STUDIES BANK 125 Rural Electrification Sub-Saharan Africa > Mali

Type of company Local small or medium-sized enterprise

Sector Energy In Mali, only 10% of the country’s 12 million inhabitants have access to electricity. Access is even lower—just 2%–3%—in rural areas, where Author(s) appliances are powered with car batteries and kerosene lamps. Candles Mamadou Gaye are used for daily lighting. Koraye Kurumba and Yeelen Kura are two rural energy services companies operated in rural Mali by Électricité de France—in partnership with the Dutch energy company NUON and Millennium Development the French TOTAL, with support from the French Agency for the Goals addressed Environment and Energy Efficiency. Their low-cost electricity, based on solar home systems or small low-voltage village micronetworks supplied by diesel generators, made big development impacts. They enhanced standards of living. They also developed new income-generating activities. And they improved the quality of health care and education. Backed by a new institutional framework and international donors, the model— designed to ensure profitability, sustainability, scalability and local 7 8 ownership—is to be expanded beyond the 24 villages and 40,000 people it serves today.

Sadia Latin America and the Caribbean > Brazil

Type of company Developing country multinational corporation

Sector Agriculture

Author(s) Cláudio Boechat Nísia Werneck Letícia Miraglia Sadia, one of the world’s leading producers of chilled and frozen foods, is a market leader in Brazil, with more than 600 products in meat, pasta, Millennium Development margarine and dessert segments. It is also the country’s main exporter Goals addressed of meat products. The Program for Sustainable Swine Production was 1 designed to reduce greenhouse gas emissions from the more than 3,500 swine producers in Sadia’s supply chain and to qualify the reductions as a Kyoto Protocol Clean Development Mechanism project in order to sell carbon credits. The programme seeks to bring sustainability to the company’s supply chain by providing supplementary revenue from carbon credits and better working conditions for swine producers. The case 7 8 details the innovative use of technology and forward-thinking project structure to capitalize on trading credits in new market exchanges.

126 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Sanofi-aventis Sub-Saharan Africa

Type of company Multinational corporation

Sector Health

Author(s) Sanofi-aventis, the largest pharmaceutical company in Europe and the Robert Darko Osei fourth-largest in the world, began a partnership with the World Health Organization in 2001 to fight sleeping sickness and other neglected diseases affecting the world’s poorest people. Initial discussions with the Millennium Development World Health Organization showed that a simple drug donation was Goals addressed not enough. Only combined action—drug donation, subsidies to fund distribution programmes and new research and development to improve treatments and diagnostics—could create a reasonable chance to bring sleeping sickness back under control. Over the first five years, 36 African countries benefited from the partnership. Nearly 110,000 lives have been saved. The case examines the special challenges and opportunities facing the partnership and the innovative ways that it has remained viable. 6 8 Above all, it demonstrates the unique leadership role that a private firm like Sanofi-aventis can play by applying its talents and resources.

SEKEM Arab States > Egypt

Type of company Local small or medium-sized enterprise

Sector Agriculture After living in Austria for 21 years, Ibrahim Abouleish returned home Author(s) to Egypt to do something about the difficulties he observed during Tarek Hatem visits. In 1977, he founded the Sekem initiative to promote social and environmental development through economic and cultural activities. Sekem’s group includes eight companies: Libra for farming, Mizan for Millennium Development organic seedlings, Hator for fresh fruits and vegetables, Lotus for herbs Goals addressed and spices, Isis for organic foods and beverages (bread, dairy products, 12 oils, spices and tea), Conytex for organic cotton and textile fabrics, Atos for pharmaceuticals and Ecoprofit (still under establishment) for sustainable management. Sekem’s efforts have contributed to the Egyptian community—economically, socially and culturally. With 2,000 employees and 850 small-scale farmers to source product, Sekem organically cultivated 3,500 hectares in 2005, directly benefiting 25,000 7 8 people. The case outlines each operating unit and its impact, in the context of the initiative’s overarching philosophy.

ANNEX 1. CASE STUDIES BANK 127 SIWA Arab States > Egypt

Type of company Local small or medium-sized enterprise

Sector Ecotourism

Author(s) Tarek Hatem In 1998, the Cairo-based environmental consulting firm EQI began investing in the Egyptian oasis of Siwa through a series of community- Millennium Development based initiatives. The Siwa Sustainable Development Initiative, led by the Goals addressed private sector, emphasizes employing local workers, applying traditional 1 systems of building and environmental management and using local materials. In Siwa, EQI’s portfolio of enterprises includes three lodges, a female artisanship initiative, organic farming and production and 3 community art projects. Today, 75 Siwans are employed full-time in EQI enterprises in Siwa, and there are typically 310 income-generating opportunities each month. The case highlights the challenges and 8 opportunities from various programmes to alleviate poverty, improve living conditions and advance the Millennium Development Goals.

Smart Communications Asia and the Pacific > Philippines

Type of company Developing country multinational corporation

Sector Information and communications A leading wireless telephone services provider in the Philippines, Smart technology / Financial services Communications, Inc. recognized that at least 8 million Filipinos work and live abroad—about a quarter of the domestic labour force. In 2005, Author(s) Elvie Grace Ganchero Filipino workers overseas sent $10.7 billion in remittances, with at least as much sent through informal channels, according to estimates. In response, Smart pioneered a cheaper, faster and more convenient way to Millennium Development send remittances using short messaging service technology. This and Goals addressed other innovations allow Smart to serve poor overseas workers and their 1 families, lowering the cost of money transfers to 1%–8%, compared with 10%–35% for standard bank rates. Overseas workers get more net income, maximizing the value of their hard-earned income to feed, clothe, educate and provide shelter for millions of families in the Philippines. For Smart, the $6 million in revenue in 2006 has spurred a broader strategy of serving low-income populations, fuelling its remarkable growth from 8 191,000 subscribers in 1999 to more than 2.6 million in 2000 to about 24.2 million by the end of 2006.

128 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Sulabh Asia and the Pacific > India

Type of company Nonprofit organization

Sector Water / Sanitation Most toilets built in 20th century India were dry latrines with a water-fed flushing system, due to the expense of pour-flush systems and the scarcity Author(s) of water. In addition, many did not have formal sanitation. In 2003, the Prabakar Kothandaraman Indian Ministry for Social Justice and Empowerment recorded 676,000 Vidya Vishwanathan scavengers in the country—people, mainly women, who lift human excreta for a living. Millennium Development Since 1970, Bindheshwar Pathak’s Sulabh International has worked Goals addressed to liberate India’s scavengers by employing low-cost, safe sanitation 1 technology. Over the course of three decades Sulabh has built a commercially viable business model—with a significant development impact. Sulabh has developed 26 toilet designs for varying budgets and locations, 3 training 19,000 masons to build low-cost twin-pit toilets using locally available material. It has also installed more than 1.4 million household toilets, and it maintains more than 6,500 public pay-per-use facilities. 6 8 Its technology has freed 60,000 people from life as a scavenger, offering programmes to reintegrate them into society.

The HeathStore Foundation Sub-Saharan Africa > Kenya

Type of company Nonprofit organization

Sector Health

Author(s) Winifred Karugu To prevent needless deaths and illnesses such as malaria and diarrhoea by sustainably improving access to essential medicines, an American Millennium Development lawyer and a Kenyan pharmacist founded The HealthStore Foundation, a Goals addressed franchiser of for-profit child and family wellness (CFW) microdrugstores 1 and clinics located in underserved rural areas and urban slums in Kenya. The Foundation operates similarly to a typical franchisor, selecting franchise owners (nurses and community health workers), providing a 34 common brand and logistics network, offering professional development and training and enforcing compliance with rules and regulations through regular monitoring. CFW shops and clinics provide access to much 6 needed and affordable health care, while generating enough revenue to pay their nurse-owners and staff competitive annual salaries.

ANNEX 1. CASE STUDIES BANK 129 Tiviski Dairy Sub-Saharan Africa > Mauritania

Type of company Local small or medium-sized enterprise

Sector Agriculture / Food

Author(s) Mamadou Gaye Tivisiki is Africa’s first camel milk dairy, founded by Nancy Abeiderrahmane in 1987 in Mauritania—an arid desert nation, where most of the 3 million inhabitants live as nomadic livestock herders, keeping camels, sheep, Millennium Development goats and cows. It now also processes cow and goat milk for domestic Goals addressed consumption. Tiviski sources all of its milk from semi-nomadic subsistence 1 herders, enabling them to earn incomes while still maintaining a traditional lifestyle. Fresh camel milk and other milk products have replaced dairy products imported from Europe, bolstering the Mauritania’s economy. 3 Indeed, recent successes have brought an unexpected challenge: lobbying Europe to import Tiviski’s camel products. The case spotlights the inspiring story of a female entrepreneur who overcame logistical and 7 8 cultural obstacles to establish an innovative value chain that supports a viable enterprise.

Tsinghua Tongfang (THTF) Asia and the Pacific > China

Type of company Large national company

Sector Information and communications technology China has the largest agricultural population in the world—900 million people. But rural Chinese have far less access to and knowledge of Author(s) Ronglin Li computers than do their urban counterparts. This digital divide inhibits Tracy Zhou human development in rural areas, impeding the country’s economic development. Tsinghua Tongfang, a high-technology computer company Millennium Development based in Beijing, partnered in 2005 with Beijing’s municipal government Goals addressed to develop the Changfeng computer, designed for rural users. Key features 2 made these systems more accessible to rural people than standard personal computers: a low-cost operating system, customized software and hardware based on thorough research on rural users’ needs and innovative rural training centres for farmers. That software includes agricultural software to provide farmers business guidance and specialized knowledge. The case examines how the private sector and the public partnered for mutual 7 8 benefit: Tsinghua Tongfang entered the untapped rural computer market and the government promoted its rural digital development goals.

130 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR VidaGás Sub-Saharan Africa > Mozambique

Type of company Local small or In a country with 500 doctors for almost 20 million people, initiatives medium-sized enterprise that can expand the reach of health services to rural people are in critical demand but in short supply. In northern Mozambique, the big challenge Sector for health clinics is the lack of reliable fuel to light medical operations Health and to guarantee regular refrigeration for vaccines. And with less than 2% of households connected to electricity, many depend on wood or charcoal for cooking. This increases respiratory infections, pregnancy Author(s) Courtenay Sprague complications and forest degradation. In this context, partners gathered in 2002 to launch a pilot project to bring fuel services to northern Mozambique. These included a former minister of education dedicated to children’s health, a Seattle-based non- Millennium Development Goals addressed governmental organization delivering health supplies, philanthropists willing to back the startup financially, Mozambique’s Ministry of Health, the governor of the pilot province and Fundação para o Desenvolvimento da Comunidade (FDC), a community foundation intimately familiar with Mozambicans’ complex development needs. As a result of the partnership, 4 5 VillageReach and FDC introduced an improved cold chain and replaced decrepit kerosene refrigerators in remote health facilities with liquefied petroleum gas–powered refrigerators. The case focuses on the supply of liquefied petroleum gas to businesses and households by VidaGás, a 6 7 8 for-profit company owned and controlled by the two nongovernmental organizations, now trying to develop a viable business model.

Votorantim Celulose e Papel (VCP) Latin America and the Caribbean > Brazil

Type of company Large national company

Sector Agriculture Brazil suffers from high income inequality and widespread poverty, Author(s) especially in rural areas. Despite recent policies to support rural Cláudio Boechat settlements through land reform, a mismatch remains between the Roberta Mokrejs Paro rural population’s social demands and the state’s capacity to respond. Votorantim Celulose e Papel (VCP), a major pulp and paper company Millennium Development embarking on a large forestry expansion in Rio Grande do Sul, devised Goals addressed a business model that included the local community as partners in 1 eucalyptus production. Through VCP’s Forest Savings Account programme, ABN AMRO Real provided farmers the financial resources (backed by a guarantee of purchase of timber by VCP) to plant eucalyptus. VCP provided seedlings and technical assistance, committing to buy the timber after seven years, at a fair price. The case looks at VCP’s business model—to achieve aggressive growth targets to triple 7 revenues while contributing to the socioeconomic inclusion of a poor rural community.

ANNEX 1. CASE STUDIES BANK 131

ANNEX 2. CASE STUDY RESEARCH METHODOLOGY

This report is based on the analysis of 50 case authors. All but 3 of the 18 case study authors studies. The development of the analytical frame- are from the country or region of the case they work and messages of the report followed an studied, thus maintaining a developing country inductive approach. The guiding question for the perspective. The research group as a whole defined report was how to make business work with the the research questions and the case studies. poor and for the benefit of business and the poor The research questions were defined based on alike. To identify business strategies that work, the guiding principles and drawing on input from the approach was to learn from businesses that all participants of the research project (box A2.1). already include the poor successfully. The goal The 50 case studies were selected from was to identify patterns and insights beyond the 400 possible cases. The selected cases had to individual case study without relying on any describe business models that included the poor preconceived hypotheses. in ways that could be profitable and that clearly The research methodology can be described promoted human development. In addition, as a multiple case study research design, following they had to represent a broad range of countries, the four stages as defined by Yin (1994): industries and business types. The selected cases represent more than 9 industries and 13 countries Design the case studies. from Africa, Asia and the Pacific, Eastern Europe Conduct the case studies. and the CIS as well as Latin America and the Analyse the evidence. Caribbean (figure A2.1). Interpret findings to develop conclusions, Conducting the case studies. Case study recommendations and implications. authors conducted their research based on the The research was guided by the overall common protocol. For almost all the cases, the principles of the Growing Inclusive Markets authors carried out primary research including Initiative: a developing country focus, a core fieldwork. Triangulation was achieved through business emphasis, a human development approach interviews with a variety of stakeholders and use guided by the Millennium Development Goals of quantitative data. The case studies went and a partnership/multistakeholder approach. The through an iterative review process with a team research also adopted a private sector perspective, of research coordinators to ensure consistent by looking at opportunities, challenges and solutions structure and quality across all 50 studies. for doing business with the poor from the perspective of small, medium-sized and large Analysing the evidence. The common companies operating locally, nationally and protocol made it possible to analyse the case internationally. Although microenterprises are studies systematically and look for patterns. not a primary focus, many of the business models Each case study was carefully analysed, noting showcased in this report include the poor as information on the benefits for business and microentrepreneurs. Civil society and governments human development as well as the constraints have important roles to play—but they are featured and solutions in the business model. Findings here only as they affect the private sector. were inventoried in a database by means of short descriptions. Designing the case studies. The research was Based on these descriptions, common designed as a broad-based multiple case study. The categories were developed. Constraints and study protocol was developed in a collaborative solutions were clustered according to common process with the research team and the case study themes. Since the focus of the research was to

ANNEX 2. CASE STUDY RESEARCH METHODOLOGY 133 Box A2.1. Case study research questions

Type 1. Innovations, challenges and opportunities § Question 1. What were the most important innovations (private or public sector) that allowed for a ‘win-win’ scenario between the enterprise model and the interests of the poor? (These innovations could be social, financial, technological, legal, regulatory and the like.) § Question 2. What were the challenges that needed to be overcome in order to achieve this ‘win-win’ scenario? (These challenges could be social, financial, technological, legal or regulatory, or cultural or psychological factors such as mindsets, beliefs and the like.) § Question 3. Thinking about the impact of the innovation, how were the development outcomes for the poor and the gains for the business optimized? (The innovation may be related to an enterprise or a phenomenon outside the business such as a supply chain.) § Question 4. What opportunities are the entrepreneur, the enterprise and its stakeholders pursuing? (The motivations of the entrepreneur may be social, psychological, financial and the like.) Type 2. Innovations, adaptation and scaling § Question 5. What were or could be the most important innovations (private or public sector) that allowed or would allow for scaling up of the enterprise model to produce significant ‘win win’ benefits to the poor and the enterprise? (These innovations could be social, financial, technological, legal or regulatory, or cultural or psychological factors such as mindsets, beliefs and the like.) § Question 6. What were or are the adaptations, replications or scaling options tried or available to this enterprise model? (These could be social, financial, technological, legal or regulatory, or cultural or psychological factors such as mindsets, beliefs and the like.) Type 3. Business and development model § Question 7. What business model is employed in this case? (The description of the business model should include value propositions for all stakeholders, including customers, workers, investors and poor people, whatever role they play.) § Question 8. What is the development model? (This should address how the poor are involved in the enterprise—as employees, entrepreneurs, consumers and the like—and how the impacts are focused— on unmet needs, economic empowerment or enablement or as part of business to consumer or business- to-business marketplaces, with links to the Millennium Development Goals where relevant.) § Question 9. Were partnerships or networks an important element in bridging the business and development models? (These may include formal or informal associations of the poor, local communities and the like, bilateral or multilateral development agencies, national and local governments, nongovernmental organizations, small and medium-sized enterprises, customers, academic institutions and so on.) § Question 10. What are the direct impacts of the business operation on the poor and on the achievement of the Millennium Development Goals? (We need quantitative and qualitative data where possible but also qualitative descriptions of intangibles such as empowerment, equity, self-reliance and the like. List direct benefits for the poor, such as jobs, income, investment, increased access, availability and affordability. Note any wider development impacts such as gender impact, environmental sustainability and relevance to specific Millennium Development Goals.)

identify ways of doing business with the poor, studies present a valuable source of information only those constraints that are particular to the on typical business constraints in doing business context of poverty were considered. Those are with the poor; the cases are all available online for referred to as ‘structural constraints’, because they further analysis.) In this way, a pattern emerged arise from the particular structural conditions of where all the observed structural challenges could rural villages and urban slums where the poor be subsumed under five areas of constraints and live. Typical business constraints, such as those all the innovations could be subsumed under five involved in targeting a new group of consumers solution strategies. Furthermore, the case inventory or in starting up a business in a competitive includes examples for each combination of one of environment, were filtered out. (The 50 case the five areas of constraints with one of the five

134 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR solution strategies. These relationships can be the identified areas of constraints as important illustrated in a matrix of constraints and strategies. barriers to making markets more inclusive for This matrix is the analytical framework of the poor. A review of current writings and news the report. articles on business strategies and activities to include the poor showed a tendency to take market imperfections into account to understand and Interpreting findings to develop conclusions, develop inclusive business models. The analysis recommendations and implications. For the ties together two streams of research by highlighting interpretation of the findings, the case studies were the importance of enabling market conditions and considered in a broader context of development describing strategies businesses can apply to deal theory and business strategy with a focus on poor with them. In that sense, the analysis presented consumers and producers. Reviews of the research here both builds on and feeds into ongoing on the interrelation between markets and poverty research on how to include more people into (key words are ‘pro-poor growth’, ‘pro-poor markets’ the global marketplace and, thus, contribute to and ‘making markets work for the poor’) supported human development and economic growth.

Figure A2.1. Distribution of cases studies by region, sector and type of company

Region Sector Type of company Cross-regions: 1 Other (waste, Not-for-profit transportation): 2 organization: 3 Europe and the CIS: 4 Housing: 3 Tourism: 2 Arab States: 3 Textile: 2 Information and communications technology: 5 Local small and Asia and the Pacific: 12 medium-sized enterprise: 21

Financial services: 7

Latin America and Health: 6 the Caribbean: 10

Energy: 4 Large national: 10

Water and sanitation: 7 Southern multinational corporation: 9 Africa: 20

Agriculture/food: 12 Northern multinational corporation: 7

ANNEX 2. CASE STUDY RESEARCH METHODOLOGY 135

ANNEX 3. ABOUT MARKET HEAT MAPS

Market heat maps are simple illustrations of the extent to which the poor engage with markets or how inclusive of the poor the markets are. Heat maps provide graphic representations of poor people’s access to goods and services in selected sectors—education, water, microfinance and the like—together with information on how these goods and services are being provided. In each heat map, a greater share of poor consumers being served produces more ‘heat’ (more colour in the figure); less heat (lack of colour) shows that greater shares of the poor are excluded from the market. When focused on demand, market heat maps show the nature and extent of consumer access to goods and services that are key to human development across spatial dimensions in a particular country, as well as the presence (or lack thereof) of various actors on the supply side. When focused on production, market heat maps also illustrate how inclusive markets are for the poor as producers (entrepreneurs or providers of labour inputs).1

WHAT DO MARKET HEAT MAPS ADD?

Geographic poverty mapping has been used Researchers constructing the heat maps use mostly by actors from the public and not-for- the same databases on which poverty maps are profit spheres to: based (surveys of households, the labour force and so forth). Highlight geographic variations in poverty. This creative use of poverty mapping tools Design and target interventions. should interest private, for-profit actors, because Pinpoint and coordinate priority areas for the heat maps can offer useful insights into the operational programmes and activities. economic activities of the poor—especially those living in remote areas where information is often Determine where to best allocate resources. not available. In particular, the heat maps can add Monitor and evaluate operations. value for businesses in four ways: Increase transparency and social accountability. By assessing market inclusiveness. The tool is applied for poverty reduction By clarifying supply structures. operations, for infrastructure provision and for By revealing unmet demand for the poor coordination in humanitarian crises (box A3.1). as consumers. The Growing Inclusive Markets Initiative is providing its market heat maps as a tool to By revealing unrealized opportunities to complement geographic poverty mapping. include the poor as producers.

ANNEX 3. ABOUT MARKET HEAT MAPS 137 Box A3.1. Examples of geographic poverty mapping initiatives HOW ARE MARKET HEAT MAPS CONSTRUCTED?

WaterAid’s water supply There are three key steps in constructing a market and sanitation mapping initiative heat map: measuring the total number of possible The UK-based international charity WaterAid poor consumers, measuring the total number of uses geographic mapping to illustrate the poor consumers with access to a good or service spatial dimension of water supply and sanita- and identifying and measuring the contributions tion. The maps present information on the of different actors on the supply side. availability and quality of water resources, as well as access to, demand for and use of Step 1. Measure possible demand for a water and sanitation services. While helping to good or service within a market. There increase public accountability for basic service are a number of ways to approach this, delivery, the maps can also facilitate the local since different metrics are appropriate implementation of aid instruments. WaterAid depending on the market examined. As has used several forms of water supply and a starting point to reflect demand by sanitation mapping in Asia and sub-Saharan the poor, one takes the total number of Africa (ODI 2007 and www.wateraid.org). potential poor consumers in the market.

Peace and Equity Foundation’s Step 2. Measure how much access possible poverty mapping exercise poor consumers have to the good or service. Access can be interpreted in several different The Peace and Equity Foundation in the ways with reference to different issues (such Philippines uses poverty-scanning exercises to as affordability or geographic proximity). For pinpoint priority areas for its poverty reduction the heat maps, the measure of access used is programme. A 2003 exercise—based on data on development indicators such as income, health the number of poor individuals or households and education—helped identify 28 priority now consuming or using a good or service. provinces in the Philippines. In some cases the Step 3. Provide additional information. foundation also conducts city poverty mapping This last step disaggregates the information exercises to further specify the geographic as in step 2. It provides additional information well as the thematic focus of its operations on the relative shares of the different agents (www.peacefdn.org/poverty.php). that together constitute total current supply. The outreach programme of Google Earth Market heat maps could be further specified and the Office of the United Nations High along exact population groups and along particular Commissioner for Refugees (UNHCR) markets. Several measurements of the size of a The Office of the United Nations High poor population could be used, depending on Commissioner for Refugees (UNHCR) uses what expenditure threshold is used to define that Google Earth’s virtual mapping to illuminate population. For the Growing Inclusive Markets some of the world’s major displacement crises Initiative heat maps, ‘poor people’ are defined as and to illustrate the agency’s humanitarian work people earning less than $2 a day in purchasing helping refugees. The outreach programme power parity terms (a widely used international takes Internet users on a virtual reality journey poverty line). in remote areas of Chad, Colombia, Iraq and the From a human development perspective, Darfur region of Sudan. Satellite maps, photos it is important to focus in particular on two types and videos inform users about the daily life of of markets: refugees and displaced people in those areas, the impact of the crises on neighbouring Markets for goods and services that could be countries and UNHCR’s operations. The considered to help satisfy basic human needs, programme might also serve as a logistical thereby directly improving poor people’s welfare planning tool for UNHCR to better coordinate and underpinning their broader human capabili- operations on the ground (Batty 2008 and ties (for example, water, housing or health care). www.unhcr.org/events/47f48dc92.html). Markets for goods and services that could be crucial to opening opportunities for the poor

138 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR to enhance their standard of living, increase lag behind urban areas in water access. Two years their income and further expand their choices ago, a study reported that in developing countries (for example, labour markets, credit markets, 8% of the urban population and 30% of the rural insurance markets or markets for information population lacked access to improved drinking and communication technologies applications). water sources.2 A market heat map (figure A3.1) illustrates Improving access to safe data on access to water among Haiti’s poor drinking water in Haiti population in different regions of the country. Access to safe drinking water in some countries Access to water here includes access to private is highly unevenly distributed. That unevenness piped water (inside and outside the house and partly reflects stark inequalities in access between wells inside the house) and public piped water. the poor and the nonpoor. But it also reflects Darker shades represent greater access. other factors. For example, rural areas tend to

Figure A3.1. Market heat map for access to water in Haiti in 2001 Cuba

North West

North North East

Antibonite

Centre

Dominican West Grand Anse Republic

South South East

Sources of water available to households living on less than $2 a day, 2001 (%)

Urban Rural Market heat map: 100 Access to water in Haiti (%) Households1 - 5 with a per capita income of less6 - than10 $2 a day, 2001 80 11 - 15 1 - 5 0 100Km 6 16- 10 - 20 60 11 - 15 16 - 20 40 Hole, river or lake, rainfall, other Trucked water, Note: Access to water includes access both to private piped water 20 (inside and outside the house, including from wells inside the house) bottled water, and to public piped water. Darker shades represent greater access. water by bucket Source: Based on Institut Haïtien de Statistique et d’Informatique Piped water 2001. Map produced by OCHA ReliefWeb. 0

ANNEX 3. ABOUT MARKET HEAT MAPS 139 Presenting data on the providers of water areas, where they deliver water on trucks (in services, the market heat map also reveals some bottles or by the bucket). Critical services are thus insights into the provision of drinking water in provided to the poor, in urban areas particularly. Haiti. It shows that access to piped water net- Where country capacity is very weak, and works in Haiti is generally very limited: about a where large investors may be reluctant to engage third of the urban poor, and less than a third of for a variety of reasons—as in Haiti—tapping this the rural poor, have access to such networks. ‘other’ private sector could be a pragmatic way of Interestingly, the heat map suggests that there increasing access to safe drinking water. Market may be a business opportunity in the water market heat maps can help to reveal such opportunities. even in Haiti’s richest region, the West, home to its capital city Port-au-Prince. Recent estimates Banking on mobile phones concerning Haiti’s regional poverty patterns reveal in South Africa that poverty rates are lowest in the West (60.8%) Mobile phones can improve access to information and highest in the Northeast (94.2%). Nevertheless, and communication technology services in devel- even in the less poor West, poverty is high by oping countries. According to recent estimates, the international standards. The less than $2 a day number of mobile phone subscribers in low- and poverty rate for the West exceeds that of any country middle- income countries is already far higher in Latin America and the Caribbean.3 In addition, than in high-income countries. estimates of the distribution of the poor population Mobile phone access could help to reduce within Haiti reveal that it is mostly concentrated poverty and inequality by helping poor users to in the West: almost 30% of the national poor live engage more effectively in market exchanges. there. (By contrast, although the Northeast is For example, farmers, fishers and other rural Haiti’s poorest region, it is home to just 4.7% entrepreneurs with mobile phones could increase of the national poor.) their access to market information, earning the best possible price for their goods—while also saving In the West of Haiti, where nearly one third the higher costs that they would incur acquiring of the country’s total poor population lives (and such information without mobile telephony. piped water access rates are higher than in other The development of mobile banking regions), only 18% of the poor have access to (m-banking), which involves the use of a mobile piped water. phone or another mobile device to undertake However, the market heat map also shows financial transactions linked to a client’s account, that 45% of people in Haiti’s urban areas have appears promising here. The widespread, growing access to water from trucks, bottled water and use of mobile phones in developing countries— water by bucket. In other words, 45% of the and the power of the various actors involved in country’s total urban population is willing to pay providing financial services through this channel, for safe water. Might a business capture part of mainly network operators and banks—could help that existing market by introducing more efficient, to ‘bank’ the ‘unbanked’. less costly water delivery services? Other opportu- Market heat maps shed further light on access nities might exist in other regions of Haiti with to mobile phones among the poor. For South even lower access rates, especially rural areas. Africa, figures A3.2 and A3.3 illustrate the access The market heat map illustrates an interesting to mobile phones among the nonpoor and poor in aspect of Haiti’s water market: despite the lack of rural and urban areas and in different provinces. adequate public water provision and the lack of Darker shades indicate higher access rates within large private investment, small water providers the specified income group. have stepped in to fill the gap and have been As the market heat map shows, mobile phone doing a thriving business. Some consumers have access rates are higher for both the poor and the invested in their own water sources—for example, nonpoor in South Africa’s west (Northern Cape, by drawing water from wells in association with Western Cape) and east (Northern Province community-based organizations.4 But small-scale Limpopo, Mpumalanga and Kwazulu Natal)— private service providers also play a major role in ranging from 41% to 80% for nearly all provinces extending access to water, mostly in peri-urban in those regions.

140 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure A3.2. Market heat map for access to mobile phones in South Africa, 2006 ZIMBABWE

BOTSWANA

Northern Province NAMIBIA Limpopo

MOZAMBIQUE

Mpumalanga Gauteng North-West SWAZILAND

Free State Kwazulu-Natal

Northern Cape LESOTHO

Eastern Cape

Source: Based on FinScope 2006. Western Cape Estimates for mobile phone access are taken from the survey category ‘personally make use of…prepaid cell phone’. In South Africa, as in many African countries, prepaid is often the only or most-used option. Map produced by OCHA ReliefWeb. Market heat map: Households living on more than $2 a day Share of households with access Access to a mobile phone in South Africa: to cell phone, by region, 2000 (%) Households living on more than $2 a day Share of adults, 2000 (%) 0 - 20 Urban Rural 21 - 40 100 41 - 60 80

61 - 80 600 100Km

20 Do not have Have By contrast, mobile phone access in the 0 Eastern Cape—a province with a fairly high poverty rate5—is low for both the nonpoor and the poor, ranging from 0% to 20%. Yet the higher urban and rural poor people have mobile phones density of population centres and built-up areas than have access to banking services. In urban in the provinces with lower mobile phone access areas 43% of the poor adult population has access rates for both the poor and the nonpoor (Eastern to a mobile phone (see figure A2.2), but only Cape, Free State and North-West) could point 32% has access to banking services. In rural areas to a business opportunity for mobile phone 31% of the poor have a mobile phone, but only service providers. 19% have access to banking services. For financial services providers, too, the market Those differences suggest a possible opportu- heat maps could offer valuable information about nity to provide banking services cost-effectively key business opportunities. The heat maps reveal to South African mobile phone users. They show, potential overlaps between people with mobile phone too, that such an opportunity might be greater for access, but without banking services. Such overlaps the poorer part of the market. By using poverty in turn may indicate opportunities for leveraging mapping data to calculate the total size of the mobile phones to provide mobile banking services. of the South African poor population that has Estimates indicate that in South Africa more mobile phones, but not bank accounts, a business

ANNEX 3. ABOUT MARKET HEAT MAPS 141 Figure A3.3. Market heat map for access to mobile phones in South Africa, 2006

ZIMBABWE

BOTSWANA

Northern Province NAMIBIA Limpopo

MOZAMBIQUE

Mpumalanga Gauteng North-West SWAZILAND

Free State Kwazulu-Natal

Northern Cape LESOTHO

Eastern Cape Source: Based on FinScope 2006. Estimates for mobile phone access are Western Cape taken from the survey category ‘personally make use of…prepaid cell phone’. In South Africa, as in many African countries, prepaid is often the only or most-used option. Map produced by OCHA ReliefWeb. Market heat map: Households living on less than $2 a day Share of households with access Access to a mobile phone in South Africa: to cell phone, by region, 2000 (%) Households living on less than $2 a day Share of adults, 2000 (%) 0 - 20 Urban Rural 100 21 - 40 80 41 - 60 60 61 - 80 0 100Km 40

20 Do not have

can estimate the size of the opportunity to 0 Have leverage mobile phone access for banking the unbanked in South Africa: about 24% of the urban poor and 21% of the rural poor. in mobile phone penetration rates, as prices of Estimates of this precise intersection in handsets and services decline further and as Botswana, Namibia and Zambia reveal that this secondary markets for handsets develop (as market could be large in those countries as well they have in countries with high mobile phone (see figure A3.4). penetration rates, such as the Philippines), Mobile banking services are already being opportunities for the poor to access banking introduced in several countries, including South services through mobile phones could emerge Africa. Furthermore, with the expected increase in even more countries.

142 CREATING VALUE FOR ALL: STRATEGIES FOR DOING BUSINESS WITH THE POOR Figure A3.4. Intersection of poor people with mobile phones who lack access to a bank, selected countries

Share of adults, 2000 (%)

Zambia

South Africa

Namibia

Botswana

0 10 20 30 40 50

Rural, below $2 a day

Urban, below $2 a day

Source: Based on FinScope 2004a, 2004b, 2005, 2006.

1 The analysis here draws on Acosta and others 2008 as well as UNDP’s Market Heat Map Database [www.growinginclusivemarkets.org]. 2 UNICEF 2006, p. 32. 3 CEDLAS and World Bank 2008. 4 IDB 2005. 5 Schwabe 2004.

ANNEX 3. ABOUT MARKET HEAT MAPS 143

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